A Tribute to the Thoughts of Another and his Friend"Everyone knows where we have been. Let's see where we are going!" -Another

Thursday, December 1, 2011

Unambiguous Wealth

In the present monetary system, wealth is commonly held as ambiguous claims against the economy. We call it stocks, bonds, money market funds, mutual funds, etc… People hold their wealth in this way for the promise it makes of more wealth forthcoming! Sound familiar?

Now, when I say that there will actually be much more wealth forthcoming for those with **unambiguous** ownership of physical gold today, some people feel compelled to argue that their ambiguous claims have a better history of "more wealth forthcoming." And this argument is not without merit.

It is true that stocks and bonds did very well in the '80s and '90s. In fact, my own father is still waiting for the Dow to get back to 14,000 to regain the wealth he thinks he lost. The Dow beat CPI inflation hands down throughout the '80s and '90s, and that's how you know you made a good investment, by beating inflation.

The Dow entered the 1980s at $824. So if your $824 investment in 1980 had perfectly tracked official inflation, you'd have had $1,722 in 2000 and $2,264 in 2011 (according to the BLS inflation calculator). But in the Dow, your investment became $11,722 by January, 2000, and $12,045 today. So even though it hasn't done much in the last decade, the Dow still beat inflation by a large margin over the last 30 years.

Bonds also had a huge 30-year run as the Fed lowered rates from 20% down to 0%. Remember, as interest rates are lowered, the price of bonds issued at the previous higher rates rises. So bond investors do very well in a falling interest rate environment.

When we compare investment gains to inflation, what we're really doing is discounting the devaluation of the numéraire over the period of the gain. In other words, we are gauging our gain against the physical plane of goods and services which is what really matters. Another way to look at it is that the dollar was devalued against goods and services while your investment was revalued. This is what I meant when I recently wrote the following:

"I cannot see a dollar collapse without a simultaneous revaluation of something else. It's a seesaw. The dollar isn't collapsing against gold. It is collapsing against the physical plane of goods and services. That's the fulcrum, not gold. Dollar collapse is the force, goods and services the fulcrum, and gold the load. So gold is revaluing against goods and services. The gold revaluation is against the physical plane so as to fill the reserve void left by the dollar's collapse."

So why did the Dow revalue so much in the '80s and '90s and then level off in the noughties just as gold began its rise?

As it turns out, FOA wrote a post about this in November of 2001:

FOA (11/3/01; 14:39:16MT - usagold.com msg#129)An "inflationary depression" is in the cards -- a "price deflation" doesn't have a chance!

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Back in the mid to late 70s Sir John Templeton always drove his point home for investors watching Luis Rukiser's show. (how does one spell his name,,,,, we always called him Lou Baby (smile))

Sir John, living here on Layford Cay, kept saying that the Dow of the 70s was very underpriced and would soar. He was the most absolutely correct person stating that then! But more into the mechanics of his perception: he knew that anyone buying the Dow and waiting a decade or more, would gain way beyond mere price inflation. Monetary inflation would eventually drive the perceived virtual wealth of US stocks ever higher. So high, in fact, that their percentage gains over price inflationary gains would be incredible. They were!

Truly, what John was referring to was the effects that simple "passive inflation" has on paper assets; especially in a "reserve currency's" domestic market. In this; real price inflation is mostly exported by importing "real goods" competition. This happens as we export excess credit dollars to buy things. It also has another effect; some of that same exported printed money flows in a circle and joins native investors' buying of local paper assets. When this process first starts, "passive inflation", in the form of massive money creation that's far beyond real price inflation, allows one to gain "virtual paper wealth" even before the markets price out the gains. That is; the Dow stays cheap at first then eventually rises to absorb the money inflation! As long as prices don't rise too much.

People that followed his advice, accumulated the Dow over a decade or more; buying "virtual wealth" before the fact! Stock investors made a killing by positioning their assets where this created "passive monetary inflation" would eventually end up. Even though hard money players laughed at them all thru out the 70s, 80s and early 90s! Look who is laughing now? Stocks tromped hard money plays hands down for over 20+ years! Even considering the latest fall on Wall Street.

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I want to jump in here and add a little more explanation of what he was talking about. FOA's "passive inflation" was money inflation that didn't spill over into consumer price inflation (CPI). The reason it didn't spill over is in my recent post, Moneyness. (See also: Credibility Inflation) FOA says we imported "real goods competition." That is, we ran a trade deficit and ended up with foreign goods that competed with our own domestic goods keeping all the prices down.

And because we were running a trade deficit, those dollars that paid for it came back to the US buying up the stock and bond markets rather than the price of consumer goods. So the more easy credit we created, the more our paper investments would eventually rise, with a time lag that gave "early adopters" a gain far above consumer price inflation. Now, back to FOA:

My friends:

Today, this same "virtual wealth" effect has been created again and is located in physical gold bullion. I believe Sir John has already made part of my point but I will repeat.

When a currency system comes to the end of its reserve use, I'm speaking politically, its domestic market will come to a point where it can no longer export "real price inflation" in the format of; "shipping its excess currency outside its borders". This happens because internal money inflation, that is super currency printing, is increased so much that it overwhelms even its export flow. Worse, even that export flow later tumbles as the fiat falls on exchange markets.

The effect is that local "passive inflation", built up over decades and fully reflected in "Sir John's" paper assets, spreads out as "aggressive inflation" and hyper price rises begin. In this action, the very same wealth effect that was eventually priced into "John's" Dow stocks and other assets, begins a long march of being priced into real gold.

Anyone that has accumulated physical gold over this past long period was doing the exact same thing Dow buyers of the late 60s and early 70s were doing: ------ saving "wealth" as unpriced "virtual wealth" stored up over that "passive inflation" period. ---

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As "political will" begins to impact the economies of the US,

our old "virtual wealth" that is no longer in the form of "passive inflation" nor limited to the currency, and is openly displayed in our vast sea of paper assets values including stocks, bonds--------

must now be defended in the open with official printed money flow.
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Me again. Notice he says, "When a currency system comes to the end of its reserve use, I'm speaking politically…" and then, "As 'political will' begins to impact the economies of the US…" What he's talking about is the political will of U.S. trading partners to support our trade deficit by stuffing their reserves with U.S. Treasuries, and again it's in Moneyness that this is ending today. At the time FOA wrote that, the "political will" of Europe had already shifted away from the dollar, today it's China.

More from FOA:

The "virtual wealth" in gold, saved over years by patient investors, will also be priced to market in this process.

Never mind that during the Dow years paper gold markets could not work in parallel with all the other asset gains; it couldn't. Hard money players, trying to somehow play the Dow's game, never caught on to what was happening. Instead of buying "virtual wealth" by saving real gold; they bought leveraged bets that gold would be priced correctly during the "paper asset" years.

Obviously, this "trade" failed hard money players as the waves of value from other paper gains and derivatives leverage were employed against their every long bet on gold. Not only that; the "virtual wealth" in gold was never opened for them with the super price inflation they all thought was coming during that era!

Now that the paper game is about to stop for the Dow, it will also cut off the leverage of gold bets. Just as the real game begins.

The reason for this is that our massive, decades-long gains in our stock markets did not bankrupt the leverage in the money system. Whereas any massive rise in physical gold values cannot be priced into "derivative gold" without crashing the system.

Remember; in political inflations, money is printed to save the assets as they are currently priced; not create new loses by liquefying the leverage that's countering your play!

This paper gold market will be cashed out at prices far below real bullion trading so as to inflate further the books of the Bullion Banks,,,,,, not destroy them. At least this is how the US side will proceed.

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In this perception USAGOLD has been guiding its clients, and now the world, in much the same way Sir John did decades ago.

"Buy what has value at the greatest discount and wait for the politics of money to price your new savings correctly"!

The politics of wealth today is centered around gold bullion and only gold bullion: that is where the wealth and power will be manifest: this is where the gains will be! To bet on the rest of the hard market; is to bet against the coming inflation making your asset whole!

Place as much of your wealth in physical gold as your understanding allows and save this "virtual wealth" of the ages today: waiting for it to become real wealth, priced correctly in the marketplace, tomorrow.

Make no mistake, the wealth is there "but only there in bullion"! Because a free bullion market cannot be denied or controlled

----- when it stands between the opposite goals of political powers! ---

In this: it will separate from the politically crushing reality the current dollar-based paper gold markets represent. The premium on bullion will soar!

The "Political will" of old world Europe is about to help make our investment real. For myself, a large percentage of my wealth is being saved by going with the evolution of paper moneys: not against!

This trend is visible now and based on the forward flow of human affairs, not the backward rules of money theory!

Our future is today; if not just around the trail!

Sir Douglas; aka FOA

your: Gold - Trail – Guide

Were you able to follow all of that? This little bit gets right to the heart of the matter; the difference between paper gold and real physical bullion. Remember from Moneyness that the people's money throughout history has been credit denominated in something. The majority of exchanges up until the invention of paper money were largely on the basis of credit and trust, with accounts later cleared and imbalances settled in metal. In this way, a relatively small and stable monetary base serves a much larger economy.

But today we use that credit, that debt or liability asset as our savings, not just for trade. Now I want you to think about the fundamental difference between claims denominated in paper money versus claims denominated in gold metal. The claims denominated in paper money can be liquefied in actual base money terms by the central bank. But the claims denominated in actual gold metal cannot.

FOA: "Remember; in political inflations, money is printed to save the assets as they are currently priced… This paper gold market will be cashed out at prices far below real bullion trading so as to inflate further the books of the Bullion Banks,,,,,, not destroy them. At least this is how the US side will proceed."

So claims denominated in dollars must be saved, "made whole" for the sake of the system, but claims denominated in physical metal CANNOT be saved without destroying the banks. The entire international monetary and financial system is in dire need of something to save it right now, wouldn't you agree? The whole system appears insolvable as presently priced, a Catch-22 of incomprehensible dimensions.

But the solution is not so incomprehensible, and it was never up for debate. It was baked into the cake long ago, as FOA pointed out. You may personally prefer that they simply let the system fail. But "they" are central bankers, so we can safely predict they will try something. And that something is the only thing that can happen.

The U.S. dollar and gold will both be massively expanded to recapitalize the system, and life will go on. The difference being that the dollar will be expanded in volume while physical gold bullion will be expanded through value. And through this process, all ambiguous claims, both dollar-based and metal-based will become virtually worthless, while unambiguous gold ownership will literally explode in value.

This is an historical first. Today is the first time in history where a massive transfer of wealth will transpire through the conversion of all gold on the planet into unambiguous ownership. Think about this long and hard. More than 90% of all the gold stock has been mined in the last 200 years. During that time, unambiguous, discrete (and discreet) ownership has entailed an unnecessary expense. During the gold standard years gold was the money, so it was all unallocated and ambiguously owned. Even today, most of the gold in the BB system is still on pallets, a remnant of the gold standard years. But that is changing.

It is more important than ever, right now, to make sure that you unambiguously own discrete pieces of gold. You don't want to just own "a bar of gold" at the bank, you want to own bar number JM4835 or whatever. And you certainly don't want to own a fractional interest in a bar when you can own coins down to one gram. Better yet, have your gold unambiguously in your possession, or at least under your control outside of the banking system that is still struggling to cope with this change.

Have you ever wondered why bullion banks have been opening new or decommissioned vaults and clearing space for more gold? It's not because there's more gold coming into play. It's because it takes much more space to store unambiguous, allocated gold than it does to store ambiguously owned pallets of "gold". From my post The View: A Classic Bank Run:

Here's an interesting item that I struggled to interpret until I really thought it through. Do you remember the stories about HSBC clearing out space in their vaults, or JP Morgan building new vaults? What could be the explanation for this if the aggregate gold stock is so stable? Then it occurred to me that unallocated storage is much more space-efficient because the gold sits stacked on pallets. Allocated gold often gets put into cubby holes to assist in recordkeeping. That takes up much more space. So the process of allocation after many decades of non-allocation requires an expansion of vault space. This is how I now interpret these stories.

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Taking personal responsibility for your life's savings when you've always counted on "the system" to safeguard it for you is not an easy step to take. Converting your savings from ambiguous claims in the system (either dollar or gold-denominated) into unambiguous wealth is not without considerable hassle, risk and expense. But it has never been more important than right now. Conversion is early adoption, like buying the Dow sub-1,000. Conversion to unambiguous pieces you can possess is front running the reset, the global revaluation that could come at any moment. As a long-time reader wrote me just today: the window will be closed soon.

He also wrote this:

"A recent 'convert' to protecting his life savings, a friend said, 'wow, it hit me last night......'

I said, 'what?'

"Well, now I understand, all the policymakers are doing currently is making my gold worth higher in purchasing power as they annihilate my currency.....thus, why the heck would I hold something that they are destroying willingly!"

Yup, that about says it all!
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**ChristmasFundraiser**

Old FOFOA needs your help again. It's been 10 months since my last fundraiser, and I know there are a lot of new readers out there. Yeah, I did drop a hint or two back in August, but to tell the truth, that didn't turn out to be much of a fundraiser. There are a few of you who have been very regular and generous in your support! You know who you are, so THANK YOU THANK YOU!! But for the rest of you, I could really use your support right now.

In the spirit of full disclosure, I am living the austere dream! I have no debt, low expenses and a modest stack of gold coins. And I'm able to be here writing this blog thanks to your generous support. For the past couple of years, donations alone have been covering my expenses. But lately they have only been covering a portion of my expenses, and now I've run down my cash reserves to the point that I need to do something, either seek an income or dishoard some of my savings prematurely.

With 2012 right around the corner, we've got a year of heavy events in front of us; a Presidential election, the euro debt crisis, helicopter drops, etc… So if you appreciate this blog and having me here to do what I do, and if you are one of the thousands of readers that checks in every day, please consider making a donation, a contribution toward keeping this going into 2012.

I still think FOFOA should become a bullion dealer to generate some income. I would gladly pay an above market premium on new purchases as a way of saying thanks. In my opinion most of the best posts have already been written. IMO we are now in a waiting period that may last weeks, months, years or maybe even decades. Like FOFOA I have placed my bet, eliminated my debt, reduced my expenses, and prepared for come what may. The irony is that as more people drink the kool aid, grasp the the message and follow the trail, the harder it will be over time to raise money through donations.

May I suggest to all that if you have found something of value within this blog site, you simply donate. Then whenever FOFOA posts you simply apply this measure once more and if you have discovered something valuable to you, donate again.

I feel very sure that this metric will work to accomplish the common good, keeping this site free and open to the most people possible.

"one of its heads wounded to death; and his deadly wound healed; and all the world wondered after the beast [...] saying Who is like unto the beast; and who is able to make war with him" (Rev. 13). Obscure passage, I know. Has had many interpretations, I know. Could (could?) apply to $-system? In that case, big surprise for all of us: $-system deadly wounded "for all to see" will become suddenly alive and well, and more powerful than ever. In case of such "resurrection", beware my friends! By all means, don't "worship". It's extremely dangerous. Consult your bible for more information.

"The CME notified us very very late last night that we had a monstrous 11,429 contracts served on first day notice which is absolutely huge. It gets better. The OI for December tonight rests at 18,158 or 1,815,800 oz or 56 5 tonnes of gold or approx 56% of registered gold. The first day notices (11,429) represents 1,142,900 oz of gold. To obtain what is left to be served upon, I take the OI standing for December (18,158) and subtract out today's delivery notices for December (11,429) which leaves us with 6729 or 672900 oz of gold.

Thus the total number of gold oz standing in this huge December delivery month is as follows:

1,142,900 oz (already served first day notice) + 672,900 oz (to be delivered by the end of December) = 1,815,800 or 56.5 tonnes of gold.

I have been quiet with all the new commenters, but this post is, once again, a gem. The absolute clarity of your prose is irreplaceable. IMHO, although your body of work is encyclopedic and exhaustive, it is the "undergraduate" course. As your work gets more and more layered and self-referential and the "long emergency" continues, I can't imagine getting through it without you and your wisdom.

In the FOA quote, (Remember; in political inflations, money is printed to save the assets as they are currently priced; not create new loses by liquefying the leverage that's countering your play!)the part I don't get is the "new loses by liquefying the leverage" part (to say nothing for the "your play" part). Without your interpretation, FOFOA, I would get lost very quickly indeed.

Another and FOA are not enough. FOFOA: accept no substitutes.

Thanks for helping me get through another year with sanity, and precious, intact. You're getting a big Xmas gift from me this year as a small measure of my gratitude. Thanks for doing what you do so well!

P.P.S. When I said that your body of work was the "undergraduate" course, what I meant was your "existing body of work" and the new ones are graduate lessons. Sometimes I can't manage to say what I mean.

"despite the challenges currently faced by europe as well as the rest of the world, the people of the euro area can rest assured that the european central bank will remain faithful to its mandate of maintaining price stability"

You wrote: "In the FOA quote, (Remember; in political inflations, money is printed to save the assets as they are currently priced; not create new loses by liquefying the leverage that's countering your play!)the part I don't get is the "new loses by liquefying the leverage" part (to say nothing for the "your play" part). Without your interpretation, FOFOA, I would get lost very quickly indeed."

Here's how I read it. Money printing is done to save the banks, not destroy them. Therefore, money printing is targeted to assets that favor the banks, not assets that are bets against the system (like paper gold).

I know, it is confusing because FOA slips from the 3rd person into the 2nd person perspective which makes you think "your play" must be referring to "your" paper gold. It would have made more sense if the whole paragraph had been in the 2nd person, like this:

Remember; in political inflations, you print to save the assets as they are currently priced; not create new loses by saving the leverage that's working against you!

Does that make more sense?

Also, you can only use a few HTML tags in comments, like bold, italics and hyperlinks which are b, i and a. See the note right below the comment box. Here's a page that will show you how to do it.

"It was three short years ago that the small former British colony of Zimbabwe was spewing forth 100 trillion dollar bills. Since then, courtesy of a few trillion extra percent of inflationary RDA, the country had given up on its currency and replaced it with US Dollars (a switch to harder 'to get' currency to halt hyperinflation --Aaron). Now, the country's cult central banker Gideon Gono has made it clear he wishes to avoid another episode of transplant currency hyperinflation courtesy of his counterpart in the Marriner Eccles building and "has warned that Zimbabwe’s nascent economic recovery is at the mercy of the United States dollar, which is facing new pressures from the Euro-zone debt crisis." Yet the screaming sarcasm is the following: "Gono says Zimbabwe should in fact be looking to the Chinese yuan as its main currency, while urgently seeking to restore its own currency which was abandoned in 2009 after a dramatic loss of its value."

A switch to a currency with an ever so slightly longer store of value makes a lot of sense if you don't have very much gold in your CB reserves.

The question Gono is probably asking himself is, "What's the spread on the week to week store of value function between the RMB and the USD needed for international transactions for goods and services over the next 12-24 months? If they are both going to devalue suddenly and soon, which one do I want to use for transactions within my borders?"

Which of the two currencies -- RMB and the US dollar -- will devalue most quickly against goods and services?

Perhaps Gideon Gono has learned a valuable lesson about currency -- with his only goal at this point to steer the Zim ship of stable prices as best he can. After all, he's seen these waters before.

What do you think FOFOA? Did Gideon miss the boat on the whole idea of the Euro? It's hard to believe he would miss the concept of MTM gold considering he understands the idea of switching to a harder 'to get' currency to halt hyperinflation for the sake of price stability.

Perhaps Zimbabwe plans to shift international commerce towards China and therefore cares not for SoV function?

"What do you think FOFOA? Did Gideon miss the boat on the whole idea of the Euro?"

Maybe ol' Gid simply reads too much Zero Hedge and therefore thinks the euro is about to collapse. Robert Mix did a three day survey of ZH back in September. He identified 23 different categories of posts, like Bailouts, Banksters, BRICs, China, etc… Out of 95 posts in three days, the overwhelming majority (24) were about the euro crisis. So out of 23 categories, 25% of the posts fell into one single category. Then he rated each article as either favorable or unfavorable toward the topic. You can check his method here, but the euro got an overwhelming unfavorable reading of -21. So a quarter of the articles were about the euro/euro debt crisis, and 90% of those were negative. You think maybe GG is one of the commenters over there at ZH?

The ECB obviously is looking for the proverbial nail in the dollars coffin as it allows the credit machine run out of gas. The FED fills up the European tank to keep the engine running to avoid the domino effect of the dollars own collapse.

Why yes I am! And thank you for noticing! Actually, I'm asking *so I can* continue doing so at the present level.

Ambiguous claims are used in the flow of value. Unambiguous possession is the stock of value. Stock and flow... see? Ambiguous claims are meant to flow, they should not be held stagnant for too long or else they degrade via the numéraire. I'm simply asking for a little of that flow, a balance of trade if you will. ;) (h/t Blondie!)

A good example of numéraire degradation is my stash of bitcoins (to the right). After I declared my target price for bitcoins as only slightly lower than my target price for dollars, one of my readers requested that I accept his bitcoins as a donation. So I set that up and he sent me six (6) bitcoins worth $100 at the time. Another reader made me the recipient of his "mining operation" and the original reader continued to donate more bitcoins. So I let them grow!! (More wealth forthcoming and all that!!)

Today I have *25 bitcoins*!!! But unfortunately the numéraire has degraded such that my 25 bitcoins are now worth 25% LESS than my original 6 bitcoins. 25 bitcoins are now worth $75. Think about that for a while. And then, if you'd like to send me a "bit" of your still-ambiguous flow, please use the Paypal button instead of the bitcoin thingy, if you don't mind. ;)

Thank you for all the donations so far! 44 of you in the first 24 hours!! Only one who I wasn't able to email because your Paypal email address is no longer active. The inactive account is something like "Prometheus". So thank you Prometheus!

Recently I had the same problem with Johnny who I was never able to thank. So thank you, too, Johnny. And a certain other supporter knows that I will even resort to calling up your business and leaving a cryptic thank you message with your secretary, if necessary! ;)

The Fed doesn't want anyone else to start their own printing press for dollars anymore than governments want gold mines to be able to charge whatever they'd like for gold in a Freegold environment. If you look back to the words of Another you'll see he mentioned the mines will be heavily taxed since they will be mining the new store of value.

Date: Sun Oct 19 1997 09:42ANOTHER (THOUGHTS!) ID#60253:

"Invest in gold mines, will you? Notice how quick the Australian CB hinted at taking "gold in the ground" if needed. This was said after their sale! The nature of the coming crisis will make the taking of investor property a piece of cake. You see, because gold is a commodity, you will be compensated at the commodity price of return + a fair profit, of course."

Date: Sat Oct 18 1997 21:04ANOTHER (THOUGHTS!) ID#60253:

What is happening now is far, far larger than the interest of a few traders or mining companies. They will be stepped on!

Start here with Another's Thoughts! and search for the words "mine" and "mining" in pages one through four. I think you'll find what you are looking for. ;-)

The Bank of Korea said it bought 15 tons of the precious metal from the London gold market last month, bringing its total reserves to 54.4 tons at the end of November.

It is the second time it has bought gold to diversify its foreign exchange reserves this year. It purchased 25 tons of gold between June and July -- its first purchase since the 1997-98 Asian financial crisis."

So the key argument is:I) extreme taxation, andII) requirement for functioning economic system

Is it not the case that all individual gold holdings could suffer extreme taxation?

I can't see the system not functioning as people will still work in a hyperinflationary environment and transition. I think this component is unknown to all as to how it will look like and will also depend on the individual country.

Could it not also be a viable strategy to hold miners and transition to physical gold as we start seeing events unfold and determine which is the best environment to avoid govt intervention in the country in which one resides?

I understand that there are greater risks in the miners, but I'm trying to get my head around the likely government reaction. I'm from Australia so a special mining tax is not without precedent.

"Is it not the case that all individual gold holdings could suffer extreme taxation?"

Sure, a government might get all stupid and try to tax my gold, but if they did I would simply take my gold to another country where it is not taxed (say Europe for example), trade my gold for Euros, by USDs with my Euros on the FX market, and then bring the USDs back to the US of A to spend on goods and services. Hmm -- that transaction didn't work out so well for the US did it? More USDs coming home while gold just left their currency zone.

I would still argue that bitcoin has proven a fine medium of exchange. Your fault when receiving the bitcoins was that you waited too long to use them on food, dollars or gold. It turned out bitcoins were only usable on the short timescale.

So everybody, keep transferring wealth to FOFOA in bitcoins, but we need FOFOA to follow his own advice and not put savings in anything other than the store of value par excellence.

/Burning

PS. As one who has donated in bitcoins, I'm glad that they had educational value at least ;-)

If you piece together the chronology of the South Korea boat sink, the japan elections after Hatoyama broke pledge on Okinawa, Ozawa witchhunt, elevation of China hawks and the quake one might see a pattern.

"I would still argue that bitcoin has proven a fine medium of exchange."

The problem is it is also trying to be a store of value, which is both a problem in and of itself and also a limit on the "fineness" of its MoE functionality.

Got FOFOA's dilemma?

"FOFOA's dilemma: When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers. FOFOA's dilemma holds true for both gold and fiat, the solution being Freegold, which incidentally also resolves Triffin's dilemma."

Also see - http://fofoa.blogspot.com/2011/06/bitcoin-open-forum-part-3.html

"Well, now I understand, all the policymakers are doing currently is making my gold worth higher in purchasing power as they annihilate my currency.....thus, why the heck would I hold something that they are destroying willingly!"

Eh. Perhaps in nominal terms. In real terms not so much. My analogy of the current system being simply an accounting scheme, and FreeGold being a different accounting scheme, comes to mind.

Not that I'm disagreeing with you, Aaron about the stupidity of government overreach, but your scenario:

"...buy dollars with my Euros on the FX market, and then bring the USDs back to the US of A to spend on goods and services."

will likely not be anything like that easy. This is especially the case if one is talking about large sums of cash. Presently one has to declare the possession of dollars in excess of $10,000 upon entering the U.S.A. Now, one could just decide to flout the law and try to come through without declaration but that, of course, entails risk.

MVI: "I prefer the gold companies to physical bullion. Is there something that I'm missing here?"

How about this, "Despite the huge tide of paper pyramided currency and notes which are now flooding the world, at some point, every credit extension must return to be based, in however minuscule a fashion, on some deposit of gold in some bank somewhere in the world." Golden

Thanks, I'm well aware of FOFOA's dilemma. And bitcoin open forum part 3 is one of my favorite articles.

In this sandbox case (max. $100) of FOFOA's bitcoins (interestingly enough savings in bitcoins is public when you have a donation address), the funny thing is FOFOA (and myself FWIW) got caught on the wrong side of FOFOA dilemma regarding bitcoins. If people like FOFOA, me and other speculators hadn't tried to use bitcoins as store of value, nobody would have gotten hurt...

I believe bitcoins would be an excellent medium of exchange globally if people would only recognize that it only has function as currency on the short timescale. Do the (more or less) anonymous transaction, and then cash out!

If FOFOA had been converting all bitcoin-donations to dollars or gold within 24 hours of receiving them, he wouldn't have lost any (perceived) value. That's a fact.

Still, I appreciate the educational factor of this exercise a lot and I promise to make FOFOA whole in future donations, for any loss inflicted by him keeping my donations for too long in bitcoins. Even if it will go to zero :-)

"If FOFOA had been converting all bitcoin-donations "to dollars" or gold within 24 hours of receiving them, he wouldn't have lost any (perceived) value"

So what good is the silly bitcoin then. Therein lies your conundrum - currency (MoE) and gold (SoV) do their own task better individually than combined via Bitcoin. FOFOA's dilemma. As you note:

"I believe bitcoins would be an excellent medium of exchange globally if people would only recognize that it only has function as currency on the short timescale."

Exactly - we already have dollars, so its redundant. Your talk about converting bitcoins to dollars above reveals even Bitcoin advocates get this obvious fact even if they miss the implications of this obvious fact.

=================================

"If people like FOFOA, me and other speculators hadn't tried to use bitcoins as store of value, nobody would have gotten hurt..."

wat - you like alpaca socks? Its not a good MoE. Its poorness as an MoE is in part because it tries to be a SoV too. Its not that people are misusing it as a SoV - trying to be an SoV is a fundamental part of what bitcoin is. The limitation on the number of bitcoins there are is fundamental to what bitcoin is.

Aaron, thanks again. My problem is that it will depend on the severity and type of government intervention, which seems hard to predict until we get closer in time. I can appreciate where you are coming from and perhaps it is wise to hedge one's bets.

Indenture, I'm not sure of your meaning. Unless I've misunderstood, you are viewing gold producers as paper assets, whereas I think they are not. They are producing the physical instead of holding it. I can only see the risk of how governments will act.

Edwardo: I agree in that there can be numerous controls placed throughout the world which increases risk.

ORLY? Good luck with that. Don't forget to thank those altruistic insiders either.

"This is where I have written in the past on this blog that if the potential windfall is big enough, I wouldn't even trust my own sister with such a temptation, let alone a stranger, a corporation, a bank or a government operation. "

"if you take the time to really understand Freegold-RPG, what I write about here, you'll know that getting there consists of three phases: a stasis followed by a punctuation followed by a new stasis. And it is during the punctuation phase or "transition" that I believe we will have a brief period of "peak risk". What risk, you ask? Well, it is the risk that your expected transition gain will be taken (or simply kept) by someone else, and you'll be cashed out at the official, legal price of gold; a price at which no physical can be found at that time. I'm not going to say much more about it here. But as ANOTHER would say, think long and hard on this

[...]

When gold is finally revalued, it will happen in the dark. You won't be able to see it happening on your ticker. And the de facto transfer of wealth that will occur will only flow to specific ounces of physical gold, not to ambiguous claims on some amorphous thing called gold. Ambiguity leads to more people thinking they have exposure to the revaluation than the amount of value there will be to go around. It also leads to the potential for the abuse of claims, since for a brief time the price backed by the legal system may be very different than the value of the actual physical in custody.

[...]

In this game of musical chairs, unambiguous, discrete pieces of physical gold are the chairs. Do you have your chair? Or do you own a claim ticket good for a portion of a chair? How will the newly revealed value be distributed? Will those that could potentially keep it for themselves hand over your fair share?

[...]

Again, what do you have? Do you have your chair, or do you have a claim check that's supposedly good for a chair?"

I can see that you like the macro value in owning a fractional interest in a corporation licensed to dig up a country's gold! But what we are talking about here is maybe a 30x revaluation of gold against other commodities as well as against the cost of mining. This will happen as a functional change for gold, a global shift away from its present treatment as just another commodity.

When that happens the mines will be treated in one of three ways: 1. They will be nationalized as gold in the ground will suddenly be viewed as national reserves (unlikely). 2. They will be forced to sell all production to the government at a low "commoditized" price (less likely). 3. They will be able to sell to the public at market prices but will have to pay a windfall profits tax and deal with many restrictions (most likely). In other words, the windfall profit of a 30x revaluation will not be passed on to those holding a government license to dig up gold that is still in the ground, a profit that can thereby be claimed by the hungry collective.

As a commodity, with the price of gold only slightly higher than the cost to mine it, governments grant license to the mining companies to dig it out as with all economic minerals. But when the value of that natural resource is suddenly worth 30 to 40 times the cost of mining, that government license will suddenly become very expensive.

When that Sunday evening announcement finally comes, that the banking system will be on holiday starting Monday morning, you want to be sitting on gold that has already been pulled out of the jurisdiction governed by the classification of gold as a simple economic mineral or commodity. FOA may be right that there will come a day on the other side of the punctuation when gold mining will be very profitable. But between now and then, few investors will be able to stomach the ride down to zero:

FOA (1/6/2001; 9:49:51MD - usagold.com msg#52)

Gold production, everywhere will eventually be extremely controlled with citizens reporting unofficial mining in much the same way as people report each other to the IRS. But, make no mistake, miners and citizens will all benefit. All mines, both big and tiny will make huge profits on the limited production allowed because the price will be so high. ($30,000+ in dollars (big smile) But, the road between here and there will more than likely price mine owners close to zero, first.

You see, gold will be a major wealth / saving asset to just about everyone. Not a currency. Make no mistake, $30,000 dollar gold divided by ($10,00 to E1.00) Euros = E10,000 in Euro gold. Gold moving to this level over the next number of years will allow the Euro reserves to cover its issuance in a dual asset world. We will all save both Euros for interest and spending and gold as permanent wealth.

FOA (05/14/00; 20:39:25MT - usagold.com msg#22)

There will be some huge profits to be made by holding certain mine stocks. But, almost all of them will go close to zero first. I doubt many investors could hold their current percentage through this price action. Physical gold will find a new market and soar in that medium of trade. In the face of this, few if any stockholders will hold their falling mining shares while watching gold soar. Yes, some will (like me) hold through thick and thin because they have a right percentage of (the best) mine shares to bullion. But, many, many others will pressure the market as they attempt to adjust to (our) level of holdings.

Nowhere will this process be more vividly seen than in our physical gold markets as they reemerge from a total paper default. During the initial default stage, the entire gold industry as we know it, both paper trading and mining, will utterly fail to perform its function of tracking the real value of physical gold.. But once the smoke is cleared, physical gold will first soar beyond every other asset medium, both precious and not precious, then it will be at the starting gate with all other real things. Then it will again run the fastest race against the onslaught of hyperinflation.

FOA (8/2/01; 12:52:55MT - usagold.com msg#87)

An investment in the gold industry, not just mining, can be nothing more than an investment in a business that balances fiat production cost against fiat market prices for its product; gold. The return, if any, is always in fiat and places this portion of one's wealth smack on the tracks of more political manipulation. Today, we can see this play out all over the world as fiat returns in the gold business head towards and even sink below zero. The investor watches this fiat illusion of his net worth drain away while the opportunity to build a real wealth of "bullion ownership" escapes yet again.

FOA (10/23/01; 10:30:12MT - usagold.com msg#123)

Truly, if ever there was a way to profit from gold mining, today, it's by buying this almost free physical gold the mines are producing; while mine players and paper gamblers pound their wealth into the dirt. This is what PGAs call benefiting from the leverage in mining (smile).

I'm not trying to scare you or to tell you what to do, Steve, only to share with you these solid concepts that have been circulating for more than a decade now. The decision of what you are comfortable holding and what brings you peace of mind is totally up to you.

"2. They will be forced to sell all production to the government at a low "commoditized" price (less likely). 3. They will be able to sell to the public at market prices but will have to pay a windfall profits tax and deal with many restrictions (most likely)."

I respectfully disagree. I think option 2 is 'better'. Option 3 would net the government almost zero taxes.

Gold mining has historically always been different than other mining due to the nature of gold. Mines used to mine their lowest grade ore, that was profitable. This extends the life of the mine you see.

Even the miners that manage their reserves stupidly will be looking for any possible way to spend money before being taxed, to reduce their tax burden. This also would be very wasteful.

Even stupid governments that initially follow the option 3, will switch to option 2 soon enough, I think. :P

You may well be correct! I was a little torn between #2 & 3 (depending on country). #3 does sound like the easier option but #2 makes more sense for G. I won't be betting you on this outcome, just FTR. ;)

Locally (being in South Africa), this is how we used to control the price, and movement of gold. Legally those statutes (forcing all gold mines to sell all production to government) are still on the books and have only been suspended 'temporarily'.

I did see this as the 'best' path when considering the issue before.

On a sidenote, as you know I am and advocate for free markets. This option does allow some interesting possibilities in that regard.

At present most of our mining industry is owned by foreign interests, which of course the government will not allow that windfall profit from 'our' resources.

Option 2 allows one the possibility of forcing ownership to shift to local residents, by placing the provision that this form of tax would be removed, as soon as all gold mines are in the possession of locals only. The implications are interesting.

Of course this is simply idealistic, but I like to dream sometimes. :P

Ambiguous claims are used in the flow of value. Unambiguous possession is the stock of value. Stock and flow... see? Ambiguous claims are meant to flow, they should not be held stagnant for too long or else they degrade via the numéraire. I'm simply asking for a little of that flow, a balance of trade if you will. ;) (h/t Blondie!)

What if FOA was wrong on the Euro? What if say, the Euro was exceptionally designed but then handed to politicians who gamed the system and fundamentally altered the underlying structure to how it was designed? Or perhaps, the political pressure to break up the Euro occurs BEFORE gold becomes the global reserve currency par excellence?

Do you consider this? I've got gold in my retirement accounts for the long term but i'm always curious to consider the alternative.

"What if say, the Euro was exceptionally designed but then handed to politicians who gamed the system and fundamentally altered the underlying structure to how it was designed?"

This hasn't happened, or do you know something I (and the rest of the media) don't?

"Or perhaps, the political pressure to break up the Euro occurs BEFORE gold becomes the global reserve currency par excellence?"

The euro is the best-managed fiat currency in the world today. By "break up" I assume you mean some member(s) leaving the euro and reverting back to their national currency because they have made more obligations than they can afford and prefer to hyperinflate themselves into Weimar oblivion rather than admit their mistakes?

The insurmountable obstacles to that possibility are not political, but procedural. No one in the free-wheeling media nor the countries suggested as potential escapees has even considered the reality of that chaos… I mean choice. I wouldn't bet on that outcome short of coup, revolution or state failure, which means war or at least massive bloodshed in the streets. See this:

FOFOA - thanks once again for getting back to me so quickly. My presumptions here are that the euro is the best 'planned' currency but not the best managed. My line of thought is that while every effort was put into the architecture of the euro, it was then subsequently handed over to politicians with their own incentives and motivations. Real.human.politicians.

In terms of 'gaming' the system I am referring to tricks used to hide deficits to reach eurozone targets, effectively holding the eurozone to ransom once in and leveraged (sorry should not have put 'changed the underlying system' after that).

By break-up I also could mean that a member defaults on its obligations, leading to a banking crisis that precipitates major political/social change the likes of which you mention,,, or perhaps a thousand other possibilities I couldn't begin to imagine.

As per your link, when I was in Italy last year, I noticed that all goods are priced in both euro and lira. When you get your receipt from the supermarket it still bears the lira price under the euro price and every item on the shelf has a lira price next to the euro one, even the gas stations still quote the lira price. The change from the euro is not impossible and certainly not outside the realms of human ingenuity. If a banking crisis strikes the eurozone and the ECB doesn't print, then widespread unrest could occur, leading to?

My main point is that future events involving human action are complex and not logically predictable from a pre-event reference point, and so every belief and assumption must be questioned for the possibility of being incorrect. Following from that I also want to question - what other assumptions could be incorrect?

Again, I am looking for robustness of individual position rather than robustness of theory.

JR, it is true that desperate times call for desperate measures and there is no way to predict what sort of actions individuals may take to benefit themselves to the the detriment of others. In a system that is focused on staying alive we see an ongoing degradation of the rule of law and regulation of trustee's responsibilities in the corporate world.

FOFOA, I am willing to consider all scenario's both pleasant and unpleasant and I can't disagree with anything that you have said. Government's are prone to pulling the trigger first and then to find an economic compromise second.

The scenarios you mentioned (2&3) are those that I would consider to be realistic and have historical precedent. I guess it will depend on the nature of the political situation in the given country as some may opt for scenario 3 and then move towards scenario 2 as MF stated.

Normally I would suggest that scenario 2 with full nationalisation would not be optimal as private capital would best be used for exploration, however given the re-rating of the gold wealth expected via Freegold there should be more than enough to ensure that even previously uneconomic activities would immediately become economic.

I would like to think that governments would respect the rights of mining production but I know that this is not a certainty. As seen in Australia recently with the political movement for super profits tax on iron ore and coal, there is already the move for scenario three. In the situation where many individuals have had their fiat based assets re-rated, there would be a strong political motivation to 'do something' and take control. I would think super profit taxes (scenario 3), would be very easy to implement with strong support.

I very much appreciate the responses; this has given me a lot of food for thought. These are issues that I have already considered briefly, but I feel that we are inexorably moving closer towards a system reset and I must make a decision soon. Inevitably it seems that the miners will carry much too great a risk and that I'll need to patiently sit on my hands with the physical.

FOFOA: "I can see that you like the macro value in owning a fractional interest in a corporation licensed to dig up a country's gold!" I very much do! Unfortunately it seems as though the value will be out of my reach.

I haven't been reading the comments section on FOFOA for a while (bad me) but has there been any mention of whether a fiscal union in Europe is part of the plan?

Does anyone have any good ideas as to how close we are to a system reset? It feels too soon just now, but I'm getting the feeling that it would likely be late 2012/13. I guess the question is whether this is something that i) requires the world to first reach breaking point, ii) they are able to 'spring' out of the blue (I'm doubtful?), or iii) a co-ordinated series of events that lead to the final outcome?

To make one more comment about the miners, I just read a post by M, which offers a counterpoint, in http://fofoa.blogspot.com/2010/11/black-friday-open-forum.html:

"These profits will be realized before the government has time to act on them. A gold sector lobby would arise from this too, which will steer the government in the direction it wants, just like the banking lobby does.

The brains and money behind the mining sector would not keep at it if they knew that they would not keep anymore of what they make then the people in the tech sector. They just went through a 20 year depression. The western world will still function when they lose all their revenue, it will just function more like a 3rd world country does. I have been to Thailand, it functions well."

Corporations have been able to have greater levels of control over government legislation as time goes by due to individual influence. In a western society, one would think that the transition to freegold would take some governments time to think about what to do and then to enact legislation.

Is it not possible that miners go through the adjustment to freegold, with some leverage of valuation, before the consequences become apparent? I would think the general public would take quite some time to get their head around what had happened - as too would some ill-prepared governments.

Is the thesis that markets will shut-down completely for an extended period during a transition phase? If so, I cannot comprehend how that would work and cannot see why some markets would not be able to operate.

Another said:Sat Nov 08 1997 18:24 "gold stocks would do well if the world would stay the same. It will not! Question, How can you dig for gold if no official exchange will quote you a price? "

Perhaps I have not given it enough thought, but I cannot see why all stock exchanges would necessarily cease to function.

Cannot we have an RPG system whilst all existing currencies continue to function without a transition period? If the currency functions, the world goes on, international trade can still happen (albeit impacted due to uncertainty and adjustment) and therefore exchanges are able to function. What have I missed?

The revaluation and subsequent legislation will happen too quickly for a lobby to form, is my wager.

You are welcome to wager on mines. It's your money after all. ;)

Do bear in mind that this kind of chaotic shift will likely disrupt a few things, such as transport. You may find that for a time the ounces of gold everyone will so desperately crave will stay in the ground a while.

A promise do deliver part of the after tax profit generated on extracting a mineral, supply lines and circumstances permitting, or the thing itself? I know my choice. ;)

I agree that a mining lobby would be a low probability event... just trying to think through the scenario.

"You are welcome to wager on mines. It's your money after all. ;)"

I still have some hope, but we shall see if I can kill it off :)

Seems as though the wager would be that: exchanges continue to function, share prices as a reference point adjust greater than the gold adjustment, said share are able to be sold prior to government stepping in an making a sweeping announcement.

The wager is also in regards to how high the gold price moves to benefit the mining shares prior to the implementation of RPG. The problem is that I have no idea as to how long we have to go.

I have read about the concept that you mention with regards to the price dropping substantially or not being quoted, however it doesn't sit well with me.

One would think that this outcome is a function of the comex failure. Which means that miners might choose to not sell at this price (as individuals also would not). Surely there would still be substantial demand and so they could sell directly to dealers or through other avenues for a much higher price.

Assuming that an official price collapse were to happen, would the gold dealers continue to function? Would you be able to obtain gold from them with a much higher premium but with stupidly cheap prices, or would all physical cease to become available somehow?

I just wanted to congratulate you for this very succinct paragraph that explains it all

"The U.S. dollar and gold will both be massively expanded to recapitalize the system, and life will go on. The difference being that the dollar will be expanded in volume while physical gold bullion will be expanded through value."

Bravo!!

There is a time taht good money goes into hiding, and there is a tiome that good money goes to work, dow expansion was money going to work, now, good money is going into hiding amd we have not seen nothing yet

Once again, Bravo!

I have been looking for ways to explain things to those are too tattooed with paper finance to listen to my lengthy reasoning. Now I know how to explain it in a nuttshell :-)

Of course there will be people that WANT gold. But. What will they pay with? What will the environment be like? Economically (domestically)? Economically (socially)? Economically ( internationally) ? For individuals? For businesses? For communities? For countries?

You also need to think about these things .. Now/during the collapse/directly after the collapse/a couple of months later/ a few years later.

I'm wading through the Trail as we speak, had started to do so a year ago but never got around to it for some reason. Sorry if some of my thoughts are not as clear as they should be for not reading this in full.

My thought was that either there was a RPG political outcome in which case there is an overnight-type adjustment or that we have a hyper-inflationary depression. Probably means the same thing overall, but the mechanics and speed of the process would be different.

My thoughts are that people can still pay for things if they have real assets. The capacity for people to pay should not be significantly different in the short-run compared to say 2 years I would think. Rather the adjustment could take a decade or more to play through. However, real assets are real assets either way. I'm not sure that any of these scenarios results in nominal price of gold falling due to a capacity to pay - rather I would think a rush to preserve fiat assets would ensure substantial capacity.

1. From The Economist today about ANC Youth League nationalizing the gold industry:

The ANC’s agreement to set up such an inquiry at all was seen as a victory for the party’s powerful and militant Youth League. Under the slogan “economic freedom in our time”, it has been pressing the government to take over at least 60% of all mines, without compensation, to distribute the country’s wealth more fairly. This, the league argues, would accord with the 1955 Freedom Charter’s call for “the mineral wealth beneath the soil…[to] be transferred to the people as a whole”.

2. Kyle Bass's interview posted earlier is very intriguing. I don't have exact time stamps, but pertinent comments I Picked up were :

- concerning his Billion $ gold bullion purchase for University of Texas Endowment Fund & why he did it. The comments from the comex official concerning the audits were very telling as well his (comex official) comment that price will solve all problems in event of default.

- Japan is dead. Thy are just deciding on funeral arrangements.

- there wil be writedowns in Europe.

- US Budget negotiations between reps and dems is like two golfers in match play having 100 foot putts, 40 ft of break against a 20 mph wind, and saying to each other:

"Good?""Good."

Point being, you agree to not raise taxes, and I won't cut spending. Lets agree to go to the next hole and print.

He also recommended reading

The Black Swan of Cairo. This short white paper is about complexity and phase transitions and why western Analytics will never spot them.

"I'm not sure that any of these scenarios results in nominal price of gold falling due to a capacity to pay - rather I would think a rush to preserve fiat assets would ensure substantial capacity."

Its more what "gold" is being priced. Today price discovery in "gold" occurs through a fractionally reserved paper gold market. The price of physical bullion is not the same thing as thsi paper gold. A fractionally reserved paper claim for gold is not the same thing as physical gold. As FOFOA wrote above:

"Were you able to follow all of that? This little bit gets right to the heart of the matter; the difference between paper gold and real physical bullion.

[...]

The U.S. dollar and gold will both be massively expanded to recapitalize the system, and life will go on. The difference being that the dollar will be expanded in volume while physical gold bullion will be expanded through value. And through this process, all ambiguous claims, both dollar-based and metal-based will become virtually worthless, while unambiguous gold ownership will literally explode in value."

"The Washington Agreement placed gold "on the road to high prices" as it signaled a phasing out of Euro support for our American gold values. How fast gold can, now, rise will gauge how much staying power the dollar has in all this. If there is any gold war now, it's to be in just how fast the dollar gold market can disintegrate into worthless IOUs! So, don't count on this destruction of our paper gold market to mark the real value and availability of physical gold; that ratio will split somewhere down the goldtrail."

"Where do you find the price of gold today? Kitco.com? CNBC? Goldprice.org? In all those places the price of gold will eventually fall. To what? I don't know. Maybe $500. Maybe $200. There are reasons why I think trading may be halted at around $500, simply to make sure that certain contractual gold deliveries are completed to certain privileged parties in the near future. But those will have nothing to do with you. For you, the price of gold that you find everywhere will be $500, but you won't be able to take delivery of any physical. Kitco will probably still sell you $500 shares of its pooled account. But they won't let you take possession. You'll still be able to buy and sell GLD for $50, but no physical. This is why I tell people to only buy physical gold and take possession of it! Today! Don't wait for the price to fall!

This is what will happen to the paper gold market (the only gold price discovery market there is today) when its futures all go into permanent backwardation at the same time. When infinite demand meets zero physical supply. When all COMEX registered physical is withdrawn from delivery. When all the holders of physical gold -->IN SIZE<-- stop bidding for dollars with their physical gold. This will be concurrent with the loss of confidence in the dollar, because it's gold bidding for dollars that matters, not dollars bidding for gold, although causation between the concurrent collapses may be unclear at the time.

Another and FOA wrote about this. They called it "physical gold going into hiding for a while." They also said that the BIS would soon after fill the "gold price discovery void" with a new physical-only gold market for the Giants, because the euro needs an accurate gold price each quarter to mark its reserves by. And they will not use that $500 price if no physical can be had at that price. And like a rising tide lifts all boats, so will this Giant physical-only gold market lift the value of the coins in your sock drawer!"Comment to Just Another Hyperinflation Post - Part 3

"Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero. This is backwardation!"

and from the comments:

"Now let's also assume that my above post is correct, that the "state of backwardation", or basically "gold has gone into hiding" is already well underway as REAL confidence in the system is now gone."

Freegold is our destination with or without the euro. The euro probably will not hyperinflate. If the Euro does fail, paper assets will burn and gold will become the "world oil currency." The Euro failing is not a good thought, no?

If the Euro does fail, gold will become the "world oil currency". We do know this full well, "the Central Banks will hoard all gold and buy any offered if this new European currency does not work" and "debt currencies fail". If this does come, no paper asset of world economic system will survive, nothing! Not a good thought, no? Thank You"

[...]

Conclusion

Freegold is our destination with or without the euro. Even on the outside chance that an SDR or a similar super-sovereign currency is accepted as the new global reserve currency, it would have to contain gold at Freegold valuations in order to be viable, accepted and trusted, in the same vein as Randy's comment about an EMF. So any way you cut it, the future comes to us with really high value gold by today's standards.

"The euro architects knew the difference between the monetary functions. They knew that the infinite growth, store of value function was the dollar's Achilles' heel. So they designed the euro to be a stable transactional and accounting currency even if the world chose non-euro physical assets as a store of value. The dollar does not have this design.

This is not to say that the euro will not devalue against gold right along with the dollar. All infinite, symbolic, transactional currencies will, which is to say all currencies will. And to a lesser extent, all currencies will have to devalue against the rest of the finite real world as well. But they will not all hyperinflate to infinity in the aftermath as the dollar will be forced to. Some will. Others will not. The euro probably will not.

This is freegold. It is coming whether or not the euro uses its secret weapon. Like I said, they would prefer not to be seen destroying the paper gold market proactively. They would rather just wait until it destroy itself (which, by the way, it is doing pretty well)."

"To what the “aim” of the United States is as their war against the world has now entered its 10th year, the FSB says, is to prevent “at all costs” the implosion of the US Dollar as the main reserve currency of the present global economic system before...."

I'm a fan of nassim taleb. From what I understand of his writing, the euro is as fragile as any other fiat currency. I would consider it naive to think the euro would survive simply because it was planned to survive. Some of you have been fooled by the illusion of control. Regardless, I still have faith in free gold, just the road we take to get their may not be the pre planned route.

I think its naive to comment on the euro's endgame without understanding the euro. The euro may fail, but if one doesn't understand how it will attempt to survive, is there merit in one's explanation of why it will fail?

I don't know if I would say i am a fan of nassim taleb's specific euro criticisms. Where he has merit in my opinion is helping one understand that when a phase transition happens, linear progressions & warnings are irrelevant.

I disagree with his specific euro criticisms, but not his general statements on risk mgmt, complexity & phase transitions.

Regarding the timing of the system reset, the very interesting technical analyst Gary Savage puts forth the view that, now that the CBs have shown that they will jointly go "all in" the Liquidity easing, there will be a dollar crisis by Fall 2014.(https://smartmoneytrackerpremium.com/index.php/2011/11/30/november-30/ ; subscription required.)Any thoughts?

Why should we listen to anyone? Just listen, attempt to understand, but don't hand out the gold medal for ideas until the winner has been found. It is impossible to see In to the future, simply because there is too many unknowns. These monetary discussions are a contest of ideas and fofoa is my favourite pick, but I don't always pick a winner, and sometimes I've picked winners who won for the wrong reasons, that's what I call luck.

My Fantasy DaydreamIn April of 2010 I read Aftershock by the Widemers and Spitz. It changed my life. I realized that there was a massive problem in the world and that I had not recognized it. Since that time I have spent most of my spare time reading about the global financial crisis, inhabiting sites like ZeroHedge (and FOFOA’s after having it recommended about 6 months ago) and changing my financial landscape. I have given up on the markets and gone to cash closer at hand, gold and guns, generators and food also close at hand. Some of these preparations have been fun; some have been more than a slight inconvenience. I continue to work but long term planning has become difficult. I no longer make decisions that will affect me more than 2 years out.I should also say I do not think I’m crazy. Those on this site may understand why I have to say this: here these concerns are understood, in describing them to friends, family and business associates and customers I have to limit and what I say be specific. If I go full tin foil hat worry mode then the eyes begin to glaze over and I feel myself being treated as a bit of a nut.I believe that the central propositions presented on this site are valid and will come to pass eventually. As Doug Casey has said, just because something is inevitable does not mean it is imminent. As Tom Petty has said, The Waiting Is The Hardest Part.So while we wait I have an idea, it is a daydream. We got here because we drifted so far from the fundamentals of solid economics. We saw our country use its might to distort the whole of global economics. This will all return to baseline however and that will be the moment to seize the role as teacher and start the process over, this time on a solid base. There will be many reprisals and calls for punishment of the leaders who lead us astray. There will also be an attempt by those same leaders to regain control by whatever means they can. This would be the moment to speak up. It would be the time to state our case. I believe we should do it with a global economic prize. It should be something that eclipses the Nobel. It should be a prize that glorifies solid economic principles but also one that garners enough attention to get average people interested in the subject so that the Keynesian nonsense that led us here can not ever again be repeated.I have come to believe that the entire system of education should be to teach enough math and reading for kids to understand economics. After that if kids are artists let them art. If they are athletes let them play. Lets just make sure they can all understand the concept of net present value of money. Let us ensure that everyone can see that to have something today, one must promise and deliver something in the future. Lets try to make kids smart enough to at least question political promises and mostly let us shame the media which has demonstrated a level of economic prowess so low that they have to be complicit in our current downfall.Let us give the world the (fill in the blank) Economic Prize. I envision this as a prize to be given every few years to an economic thinker who can look at the world and point to the current crop of liars and say, “hey, there you go again”. It would be a prize with prestige and an economic value considerably larger than the Nobel. It would shame the Nobel and the nuts who give it out. Our prize criteria would be consistent and no one like a Krugman would ever get one.

If we see a ‘punctuation event’ (as it has been called here) and gold reaches very high levels, then this site will be ripe for supporters (i.e. read donors). If it is just me then I’ll name it myself. If there are just 2 of us then we can name it together. If we can get a mob then we can argue later. The important thing is that it is big and gaudy and attracts attention and renews interest in how wealth is created and how the political process tries to redistribute it for its own goals.

When we come out of this crisis and those of us who have prepared properly are financially well off, I’d like to go to the grave knowing that the insanity we have created will not likely be repeated. If we do it right maybe we could even have the prize become a big deal, like the Super Bowl. How great would it be to be sitting in a bar and over hear folks asking, “who do you think will win the next (fill in the blank) prize?Right now this seems far-fetched but if you really believe what you see presented here on this site, then this could happen. It is just a daydream for now but maybe in a few months or years it won’t seem so crazy. There are lots of details to be worked out but the idea has been kicking around in my brain for months now.Anybody here with me?

Because they understand the issues at hand, as opposed to not understanding the issues.

You're the one suggesting people read Talib while also maintaining "I'm not sure if explanations have any merit until after the fact."

People arguing the Euro will fail because its a fiat currency don't understand the dynamics involved. The Euro is a fiat currency, and it might fail, but not simply because its a "fiat currency." To claim the Euro will fail because its a fiat currency is to deny the possibility that such a fiat currency could survive. Do you see how silly that is?

I haven't suggested reading taleb, I just pointed out I'm a fan of his ideas, but won't give them merit until I see them come into fruition. I think to understand issues at hand requires all information, is all information visible? I don't fully understand fiat currencies, it is perhaps as simple as 'all fiat currencies will fail' depending on the timeline. Do the dynamics change the outcome or are they just back ground noise? Can fiat currency survive? I do not know, my lack of knowledge tells me that fiat currencies need an ever expanding amount of credit, this is theoretically possible but in practice it doesn't take into account the psychology of the user.

I like Taleb. He should do well in the coming chaos. He doesn't understand the euro, but I don't hold that against him. Most people tend to have a area of expertise, and bring something to the table. He has some interesting ideas. :)

This does not apply to any fiat currency which is publicly valued by another metric, a metric unencumbered by synthetic replication or analog.

A fiat currency acting only as a medium of exchange needs no credit structure to maintain credence, as such credence is found by its users in its valuation as given by the sovereign metric described above. That metric is the proxy for all possible tangible goods and services said currency may be exchanged for, and the common denominator in all of these is of course value.

Unencumbered physical gold as the market's proxy for value frees fiat currency (and indeed currency's need to be fiat) from credit, and this does take into account the psychology of the user(s)*. Such a currency's credence comes from its capacity to be exchanged for things of value, nothing more, and the rate at which it can be willingly exchanged is publicly broadcast via its exchange rate for gold.

There was an interesting comment from a contributor calling himself Matt a few months ago.

He cited the example of Caribbean countries where the locals held their savings in a "hard" currency such as the US dollar but used the local currency for day to day purchases.

Matt argued that the local currency issuers did not dare to over-issue their paper because the locals would simply abandon it.

This is basically a case study for a split function. The local currency as the medium of exchange and a "hard" currency as the store of value.

If we substitute gold for the "hard" currency in that relationship it offers an insight into how the Euro Freegold-RPG architecture will function. The split system provides the discipline over the currency issuer with the market (citizens) acting collectively as the market "regulator".

The logical extension of this system, under a floating exchange rate regime, is a free market in gold (Freegold-RPG) transmitting the same signals across international borders between currency zones.

Former Finance minister Simba Makoni believes the country should not consider using the Chinese Yuan as an alternative currency as proposed by Central Bank governor Gideon Gono, in view of the challenges faced by the US dollar.

Speaking at a post-Budget meeting organised by the Zimbabwe Chamber of Commerce, Makoni said despite China being the second largest economy, the Chinese themselves were not trading in their own currency.

“Of course China has the second largest economy, but they are not trading with the yuan, they use the American dollar. Doesn’t that tell us something?” said Makoni.

“You need to ask yourselves why the Chinese do not trade in their currency. If they are not trading in their own currency how will using their currency help Zimbabwe?”

Gono last weekend said Zimbabwe should look to the Chinese yuan given new pressures on the US dollar emanating from the eurozone debt crisis.

“With the continuous firming of the Chinese yuan, the US dollar is fast ceasing to be the world’s reserve currency and the eurozone debt crisis has made things even worse,” said Gono.

“As a country, we still have the opportunity to avoid being caught napping by adopting the Chinese yuan as part of consolidating the country’s look East policy.”

However, Makoni was adamant saying: “In spite of the full push that we look East, if you look at (Finance minister) Tendai Biti’s statistics about who matters in our economy either as destination for our exports or sources for our imports, Zambia is higher than China so is Mozambique.

“South Africa is the single largest trading partner and Biti calls us South Africa’s supermarket, so why recommend the Chinese currency and not the South African rand?

“The logic is not there for me. Biti’s decision to retain the multi-currency system that mostly uses the American dollar is better than the advice that we switch to the Chinese currency.”

FOFOA: 1. Regarding the timing of Freegold – The way I approach it is that it is already overdue by ten years at least. So I think of it kind of like “the big one” (earthquake analogy) that could come at any time. How you prepare for an overdue earthquake is how you prepare for Freegold.

Jeb and euro haterz:

FOFOA: Like I said earlier, the monetary plane, which includes all that nominal sovereign debt in Europe, is only connected to the physical plane by two things, the price of goods and services (CPI or the general price level, on which the ECB has a mandate) and the price of gold (which the ECB happily floats). I think we can all agree that the aggregate debt is doomed at today's prices. It is fictional, imaginary capital. But those of you predicting the imminent collapse of the euro as a medium of exchange need to explain how nominal euro debt is more likely to break its connection with goods and services than its imaginary connection to gold at today's prices.

I'll give you a few hints. Unlike the US, where the expenses of the same government that calculates CPI rise along with CPI, and where the CB has conflicting mandates that benefit from a statistically-lowered CPI, the ECB has not only met its mandate, but done so credibly. And unlike Indonesia, the ECB does not count gold in its CPI (HICP). Instead, the ECB floats its gold publicly and without worry. So while you're wondering in which of the two choices the disconnect will happen in Europe, consider this: Over the last decade, the general price level has performed more or less as expected while the gold price in euro broke off in 2005 and rose 325% in six years...

Here's the main thing, gold will work the same way as a reserve asset in Freegold as it did before 1922, even without going back to being the sole monetary base. Gold is superior to even the entire monetary plane in this regard. It is the sole monetary member of the physical realm. Whether it is part of the transactional currency system or not doesn’t matter to its balance-governing role. It can fulfill that role even in Freegold. That’s what the architects figured out!

Not all bad indeed. Nassim even advances the same solution that the Euro intends to employ to save itself. Weird, huh? Nassim thinks the Euro will fail because, oddly enough, he doesn't understand the Euro intends to use Nassim's anointed solution. HMMMM!

So in the above scenario we have moved all property from a position of debt ownership to a full equity position that can be balanced against the rest of the real world.

[...]

Debt is unstable because it is entered into (created) so lightly, and it is based on the assumption of a fixed future performance by an entity or individual. An assumption that is currently proving to be flawed during an economic contraction.

A system that is built upon equity positions is much more stable as equity agreements are entered into with much more gravity. If both parties share in the risks and rewards of future performance they will take everything more seriously. Also, equity agreements are based on the flexible assumption of variable future performance! A much more realistic assumption.

[...]

So the instability of this debt-based system grows ever more dangerous as efforts are made to stabilize it. The growing mountain of derivatives is truly a house of cards capable of bringing down the whole system! How's that for stability and sustainability?

The question then becomes how will Mr. Market convert debt into equity and bring the system back to a state of sustainable stability and stable sustainability? Obviously our money masters have refused to go there willingly. Obviously our banks have refused to give up their debt positions. So what is next?

Metamorphosis

[...]

For those of you who can't already see the obvious answer, as Another once said, "time will prove all things."

concerning a possible break-up of the euro zone, I already wrote that I think that the weak countries are trapped and they cannot leave. How would they organize it at the technical level? They need new bank notes or at least mark existing notes. They need to reconfigure their ATMs. They need to change the software of their commercial banks. They need to decide which debt and which account balances to redenominate in the new currency and which ones to keep in euros, and they have to make this legally fool proof.

In order to organize this there will be thousands of insiders, and these insiders will make sure there is the total run on the bank before the deadline. They can only avoid this run on the bank if they shut down their banking system and their international transactions for a couple of weeks. How about supply of food and energy during that time?

Finally, one such a country leaves, say Greece, international investors would immediately sell-off all bonds that are being switched to drachmas and bankrupt the government. If they don't switch their bonds to drachmas, they would be bankrupt because they would still be unable to service their euro debt.

Nothing to gain in such a scenario. In fact, I think, the best strategy for Greece, for example, is a bankruptcy inside the euro zone. They can even announce this unilaterally, and it does not have to bee too orderly. They know the ECB would have to keep their commercial banks on life support (or risk the total breakdown). They also know that the rich countries around Germany will not pay for their deficit forever. So it is basically a question of the timing, and they might in fact be in talks with both ECB and Brussels about this, trying to get out a bit more if they cooperate on the question of the timing.

Conversely, can a strong country such a Germany, leave the euro? Yes, at the technical level this is much easier because there is no risk of a run on the banks in this case. They could just decide on a deadline for the switch, say yesterday, and then take a couple of months preparations to put things in place.

But then, when for example Germany leaves, they find themselves in the same position as Switzerland did this summer. They might immediately be forced to peg their New Deutschmark to the euro again. So why bother to leave in the first place? Finally, as FOFOA always stresses, the euro zone as a whole has a balanced trade account and as such is not too vulnerable to a future collapse of the dollar. Germany alone, however, would be vulnerable.

concerning the miners, I think they are a speculation on a scenario in which we see first a lot more money printing in the US, then an increase in consumer prices and then a run on hard assets by the institutionally managed money, similar to the 1970s, before the dollar finally breaks down and the financial system is reset (i.e. when international central banks officially accept the end of the dollar and start clearing in physical gold).

FOA thought that a repeat of the 1970s was unlikely and warned of the mining stocks as a general strategy. This is probably linked to his prediction that the London gold market would already blow up shortly after 1999 at least the timing of which has turned out to be wrong.

From what I have understood so far, I cannot rule out a repeat of a 1970s scenario, at least for a few years, before the financial system is eventually reset. Nor is there any guarantee for this outcome. Apart from buying the right companies, you would also need to figure out when to sell (before the governments raise the taxes so much that your investment no longer makes sense - think about how producers and explorers would fare under the different scenarios), and once you sell, you might not be able to convert your fiat proceeds into physical gold anymore. So you would need to switch to something else (real estate, industrial companies ...).

In spite of having read FOFOA for a while, I still don't think this is an entirely stupid strategy to consider. But you need to think about what share of your funds to commit, and you need to carefully think about the risks, and what you do when one of your ideas turns out to be wrong. For someone who has no experience with mining stocks, this is probably way too risky.

FOA thought that the London price would eventually start falling, but physical gold would only be available at an increasing premium over that price. As I understand it, his argument was that the BBs would eventually be protected and be allowed to settle unallocated balances in cash (at an 'official' LBMA price much lower than the cash price of physical gold).

Now we are 10 years into the future. What do you think would happen in this situation?1) the major refiners would start posting their own price for physical gold, having their own auctions, making the trading volume public2) the major coin dealers would start making a market for coins and small bars, posting the current (higher) prices online3) the exchange in Kunming (China) that will operate on a fully allocated basis, would discover a price different from the official LBMA gold fixing4) all paper currencies are particularly vulnerable to a loss of confidence during this time because quantities of a few kilos would already be very difficult to trade (today it is perhaps a few tons when it gets difficult)

This way, the US (and UK) might just provoke foreigners to step in, perhaps other CBs to start making a market in physical gold. If this happens, would this not be an official admission of bankruptcy of the US block?

For this reason, I have another scenario that I still consider plausible, namely that the LBMA banks will eventually have to bid up the price of physical gold high enough in order to cover all their unallocated liabilities. And the Fed/BoE would print the money necessary to facilitate this. Just to avoid the consequences of a failure of the 'official' gold market.

Re 1), that is what the Perth Mint already does. The 5 tonne or so per week we refine is currently auctioned. Settlement can be full cash, but mostly is done in London paper gold plus a cash premium. I just watch this premium, it will tell me when paper gold has really disconnected.

BTW, miners sell their metal to us either for cash or swap for paper gold (which they then on trade).

The system will break when miners find few willing to take their paper gold or the price offered is much lower than what we will pay. And in that situation we will always be after to better the offers they get because we are getting better prices for the real physical at the other end.

Because the Perth Mint stands as intermediary between physical buyer and physical seller, the miner is always informed as to the real price of gold.

We are not reliant on the London market to tell us the price, we make a Perth price every day. However currently London is a convenient settlement mechanism for us the miners and the buyers, but it is just to help the flow.

Exactly - we already have dollars, so its redundant. Your talk about converting bitcoins to dollars above reveals even Bitcoin advocates get this obvious fact even if they miss the implications of this obvious fact.

Since BTC is not wide-spread enough, at some point you still have to convert to dollars before converting to stuff (besides alpaca socks).Maybe I'm just a nerd, but I think it's cool that I can transfer value across the Atlantic without directly engaging with the banking system (at least until something is needed that is not offered in BTC).BTC is a technical innovation that reveals the redundancy of the bloated banking system in exchanging non-physical money.

wat - you like alpaca socks? Its not a good MoE. Its poorness as an MoE is in part because it tries to be a SoV too. Its not that people are misusing it as a SoV - trying to be an SoV is a fundamental part of what bitcoin is. The limitation on the number of bitcoins there are is fundamental to what bitcoin is.

I have to agree that the maximum number of bitcoins would eventually prove an obstacle, but we haven't reached that stage yet and it is not really a fundamental property of BTC, much like the US debt ceiling is not a fundamental property of $IMFS. The price bubble was because people overvalued the SoV part.Right now, Bitcoins, as a new attempt at making a currency/MoE has had decent success if one looks at the flow compared to a couple of years ago.

If people overvalue the SoV part of Bitcoin, maybe it's because BTC advertises itself as a store of value.

from the website:

Economic rules

Hard limit of about 21 million Bitcoins.

http://bitcoin.org/about.html

As for zapping payment around the world without a bank, I can do that with western union, or maybe you prefer hawala.

Hawala (also known as hundi) is an informal value transfer system based on the performance and honor of a huge network of money brokers, which are primarily located in the Middle East, North Africa, the Horn of Africa, and South Asia. It is basically a parallel or alternative remittance system that exists or operates outside of, or parallel to traditional banking or financial channels.

http://en.wikipedia.org/wiki/Hawala

No encryption necessary, no conversion back to currency necessary, no finding another user, no value erosion vs the currency because it is the currency, etc. etc.

"The total gold comex OI fell by a rather large 3591 contracts, from 430,118 to 426,527 despite gold's advance on Thursday. We lost some gold bankers along the way. The front delivery month in gold is exciting to watch.Here the December month saw its OI fall from 6815 contracts to 3834 contracts for a loss of 2981. We had 4638 delivery notices on Thursday so we gained a huge additional 1691 gold contracts standing and lost nothing to cash settlements. It seems that we have some very anxious buyers of gold lining up at the comex to get whatever metal is available. The next big delivery month is February and here the OI fell from 264,239 to 262,255 for a loss of 1984 contracts. This is where some of the bankers threw in the towel. The estimated volume at the gold comex on Friday was a very tiny 122,281. The confirmed volume on Thursday was also anemic at 123,485. It seems that the MFGlobal scandal has had an effect on players wishing to invest.They are fleeing the comex as fast as their little feet will carry them."

That's great. Can you please advice how I can use the Hawala system? I live in northern Europe.I don't see why it is wrong to have another alternative outside the traditional banking system?If the world could handle Western Union (NYSE reg'ed company) and Hawala as alternatives before, I don't see what's wrong in having a third alternative like Bitcoin.

Agreed.I hope that the peer-to-peer properties of bitcoins will be kept alive. The fact that trust is not a central thing, but a mathematical thing (public/private key) and a personal thing (your computer security is up to you) is also nice.

The Bitcoin total amount ceiling will need to go. I'm sure "Bitcoin-advocates" will realize that soon enough (like US politicians realizing the debt ceiling needs to be higher every time we're there).

I'm not saying that bitcoins should replace the Dollar or the Euro or something, but I hope it is successful as an alternative system more or less free from government intervention. Free choice and all that.

The india/iran situation may have to do with upcoming EU sanctions on Iran's central bank related to the UK embassy attack. India might want to go along with limiting funds transfers, but still get oil. The west can't make much outcry over transfers of gold, because we all know gold isn't important, is it?

Thank you for the bitcoins! And yes, they do have great educational value:

I think the fundamental problem is that the issues people think bitcoin has addressed and/or solved were never issues for a currency in the first place. They are non-issues that have been propagated by people that don't understand currency theory and addressed/solved by a genius who listened to the wrong monetary arguments.

For example, you mentioned the personal responsibility thing, decentralized security. The security of bitcoins is left up to whoever possesses them. This is not a solution that makes a better currency. On the contrary, it makes a terrible currency. If we view the currency realm as the flow of value and wealth as the stock of value, then decentralizing bitcoin security is a clear attempt to make it more like wealth than currency. Remember, possession is the property of wealth.

I discussed this before. People really like that they can have fiat currency replaced if it is lost in a fire or something like that. In the flow of value you want a central guarantee that insures the unmolested flow of value. And that can only happen with fiat because the currency is a symbolic token rather than a hard commodity. Being a symbolic token that has obtained the properties of a hard commodity, as bitcoin has done, makes no sense unless you buy the arguments of those that don't understand the difference between currency and wealth.

Bitcoin is limited in quantity. Again, it is symbolic token built to achieve a property of wealth, not currency.

Bitcoin cannot be printed at will by governments or banks. Again, banks only print up credit denominated in a currency. If bitcoin was to be adopted as a real currency, then banks could print it. And the fact that bitcoin is out of the reach of governments only ensures that its use as a currency will be short and full of strife. Once again, it has achieved a commodity property and unwittingly claimed that as a currency victory. This ignorant pride can only be the result of misunderstanding money.

The issues that bitcoin mistakenly tried to solve were never currency issues, they were store of value issues. And we don't need bitcoin because we already have gold. As a currency, bitcoin is a masterful achievement in destroying virtually all of the beneficial properties of a modern, digital currency.

Victor, that scenario is checkmate. Gold would not be for sale, and their action to bid gold higher would start a panic. Not gonna happen unless TPTB decide to move to a freegold system with plenty of advance warning (and I see less than zero inclination of that from the current US regime). They would just re- write the gold delivery rule with some kind of force majeure excuse.

It's exactly what the US did in 1971, and that was a very big deal but everyone got through it. Now you are just talking about specs getting burned, and they could care less about them. I bet it wouldn't even get much MSM time. So I see no reason to think they won't do the exact same thing on the gold exchange also if it came to that.

Thanks for the link to the David Apgar essay. Full of bullseyes about the Euro as opposed to the MSM which is full of bull.... Well, you know what I mean.

Here's a taste for anyone who hasn't read the essay (my emphasis).

The alternatives to partial defaults by countries that can’t afford to pay rising interest rates, furthermore, may be unsustainable. The most popular alternative has the ECB stepping in to buy bonds every time investors try to cut their exposure. At first blush, it looks clean – no forced austerity, no messy investor losses and bank restructurings, no burden on taxpayers in creditor countries like Germany. The only problem is that it would be inflationary.

And that inflation turns out to be quite a problem. With such ECB generosity on offer – and with euro zone inflation looming – why would any bond trader with a pulse stop after dumping her Greek, Portuguese, Irish, Italian, and Spanish exposure? Why not get rid of the French and German paper in the vaults, as well? Get rid of it all. Well, maybe not the Estonian bonds. But the ECB would be buried.

Printing Euro to monetize all of the excess debt in the EU is not now and never will be a solution. Which leaves only one alternative - someone (or several someones) aren't going to be repaid.

Here is the link Robert posted above in case this taste has inspired anyone else to read the essay.

OK, can someone tell me what will happen to the USD through out this transition, or indicate the required reading, I understand the USD, British pound and japenese yen have entered hyper-inflation, but don't understand how this mesh's together with the EU plan to bring about free gold, is there a reason why the US has chosen to destroy Its currency? I just don't understand but I am getting through the reading slowly, a few fill ins here and there will help me. Much appreciated :)

From the first para of the article:'Surprisingly, you can make a decent argument that the euro zone is at no risk of breakup – unless someone secretly switches its purpose from facilitating European trade to providing investors an implicit guarantee against losses'

..and ?? I'm in no way new to the problems in the euro, having taken on-board reggie middleton's analysis about 3 years back. My point is - show me a struggling developed world economy that DOESN'T use its CB to provide an implicit guarantee against losses. After all, what is the difference between this depression and the great one? I personally believe the key difference is the backstopping of the banks by the CBs so that the whole economy wasn't wiped out. Yes i know it makes more sense to take you're losses up front but what is our track record on taking that path?

Now I know that the euro is different, i understand that they can print and it will only change the ratio of currency 'tickets' to reserves but what if they don't print? sure the currency will be strong, but it will also be scarce if bank runs start - facilitated trade? Can the member states really nationalise the banks when they have to pay nose bleed bond rates themselves? What follows from an eu wide depression - free and open trade or desperate political attempts to overthrow the current system?

Just thoughts, but I don't believe that being in zerohedge nullifies an argument just because its in zerohedge(and I still believe that gold is the best place to be regardless).

"Now I know that the euro is different, i understand that they can print and it will only change the ratio of currency 'tickets' to reserves but what if they don't print?"

My first thought is that this would pressure the US to act (print), forcing the Fed to dig its hole ever deeper while the ECB gains that much more maneuvering room. For amusement - in my head, I'm picturing this as two closely-matched UFC fighters grappling on the mat, one being forced to trap himself by the other.

Matt, your last post confuses me. I thought you were suggesting that the Euro might be in trouble. I guess it would help if I knew what you meant by that. What does ZH mean by that? Does "in trouble" mean that one or more countries might leave? That one or more countries might get kicked out? Does it also include the possiblility of hyperinflation? In all three of these scenarios, the currency will continue to exist, though possibly in a different form. What scenario is it that you are worried about, and what is your specific concern? What outcome do you you think is the right outcome?

I ask because the easy money crowd and the bondholders (backed by the MSM and the beholden politicians) are pushing for massive printing, all in the name of "saving the Euro". Whatever that means. It seems that it means so that nobody will leave or get kicked out,and so the bondhonders get paid in full, at least in nominal terms (just like Another/FOA/FOFOA predicted). Though the scale of printing required might doom the Euro to a hyperinflation in the long run.

The Germans on the other hand seem to want to "save the Euro" by doing the opposite, by forcing some losses and at least some austerity, even if this forces all parties to address the imbalances sooner rather than later, and even if it makes the short term pain more severe. Sort of like how Paul Volcker "saved" the dollar by jacking up interest rates and precipitating a severe recession.

Which solution do you think "saves" the Euro? It depends on what you see as the fundamental problem.

You ask "Can the member states really nationalise the banks when they have to pay nose bleed bond rates themselves?" He answers that later in the article, suggesting that context makes a big difference. Mexico was back in the bond market very quickly. Argentina got punished. The political context matters. You raise the risk of bank runs, but it is one thing to print to protect depositors. It is quite another to print to make sure all of the bondholders get paid.

You ask "What follows from an EU wide depression . . . ?" This is the same question facing the U.S. Is it better to take the bitter medicine and face severe pain now? Or it is better to spread the pain over decades? He also answers this question in the article when he talks about Japan.

"So what good is the silly bitcoin then. Therein lies your conundrum - currency (MoE) and gold (SoV) do their own task better individually than combined via Bitcoin. FOFOA's dilemma."

Absolutely. During discussion in Bitcoin open forum, I'd been looking for ways to accommodate a dual-nature of sorts into the existing Bitcoin system. Even though it's technically feasible (it's like getting mortal enemies to live under one roof), the difficulties of doing so would introduce too much complexity; it's far better to avoid the numerous small problems that could balloon into big ones by moving that interaction to a different level. It would still behave like two separate components anyway.

So Bitcoin couldn't be a universal currency any more than gold could. Introduction of a paper counterpart solved this issue for gold. The only thing that makes Bitcoin work well as a SoV is that it approaches a unit-generation asymptote. Removing or inverting that limit in a complementary blockchain (that's the record which lists all relevant transactions since genesis of the system and acts as the memory of the network) retains the elegance of the Bitcoin implementation while providing price stability, addressing FOFOA's dilemma.

This is a project already in the works. The concept has been largely fleshed out, stemming from discussion about Altcoin, and the software development is in early stages. While Bitcoin is an abstract version of gold (limited by structure), Altcoin is the decentralized equivalent of fiat (effectively expandable to infinity). In this sense, they are fully independent and the level they'll interact at is on the exchanges - reminiscent of the Euro.

As pointed out by FOFOA, a loose currency based on the Bitcoin system would offer no perceived improvement over existing fiat even though the decentralized nature is a phenomenal change from the central management problem. The fact that it acts just like every other fiat currency is all that users of it would see. Therefore, Bitcoin had to come first or there would've been no way to build up a stock to handle the flow.

To use a beach analogy: waves washing up on the sand simply flow off of it without leaving much water behind, which is how Altcoin would behave; a depression in the sand would collect an amount of water commensurate with its depth and diameter, as Bitcoin has been doing for almost three years now - and the hole is growing.

Market capitalization was maybe USD$10mm before the speculative wave began; it was about USD$180mm at the May peak when overwhelming flow hit, but it hasn't disappeared - the total is still about USD$25mm which is where it would've been if there was no bubble and gradual progress continued. External flows (BTC/USD) have leveled off while internal flows (BTC/BTC) are still sizable, so USD wealth is either parked or trapped in an amount more than double what it was nine months ago.

Regardless, the idea can't be ruptured unless the currently-proven mathematical basis it rests on is broken. This is why Bitcoin can conceivably go to zero, but keep coming back. If it does break, I'll be among the first to acknowledge it.

Digital security will always be suspect, advances in hacking will always be a threat.

However, the security of underground vaults and big hairy men with massive guns, automatic laser death rays (smile) or whatever ultimate futuristic weapons deployed in security will always be preferred. Possession is beyond doubt in this scenario, and possession is what's it's all about.

Although the main desktop software interfaces are still fairly technical, the security required is about the same as with a login for a bank or brokerage account: don't share your password, make it a little more complex than '12345' and make sure you remember it. It isn't quite as easy as walking into a local bank branch where the teller knows you and being able to conduct a transaction without handing over identification, but it doesn't require ridiculous measures (unless you're a paranoid Bit-hoarder).

There are a few functional software packages that reconstruct a deterministic key based on a passcode, such as Electrum. Integrating camera functionality could allow facial data to be used instead of the passcode, although that's always a backup.

"People really like that they can have fiat currency replaced if it is lost in a fire or something like that. In the flow of value you want a central guarantee that insures the unmolested flow of value. And that can only happen with fiat because the currency is a symbolic token rather than a hard commodity."

So long as the Bitcoin network exists, the coins/tokens/transactions cannot be lost, only become inaccessible (for now). Every node has a copy of all the symbolic tokens - yours, mine, everyone's. Unless every participating node has its memory wiped at once, they're as good as permanent.

"Bitcoin cannot be printed at will by governments or banks. Again, banks only print up credit denominated in a currency. If bitcoin was to be adopted as a real currency, then banks could print it. And the fact that bitcoin is out of the reach of governments only ensures that its use as a currency will be short and full of strife."

This is why it has the potential to make banks & governments irrelevant in certain respects. In order to eradicate Bitcoin, the internet would have to be dismantled. That's now a vital part of infrastructure, so it would be crippling for any nation that makes the attempt.

As for the currency/wealth dynamic: Altcoin/mote/whatever-it'll-be-called.

"The issues that bitcoin mistakenly tried to solve were never currency issues, they were store of value issues. And we don't need bitcoin because we already have gold. As a currency, bitcoin is a masterful achievement in destroying virtually all of the beneficial properties of a modern, digital currency."

With so many failed attempts at creating a new MoE system that competes with existing fiat, maybe it was better to go the SoV route. It's certainly had better traction with less resistance.

If my gold is lost or stolen, it's gone - but it's a physical object that simply exists without electricity or math. With Bitcoins, the network itself provides both existence and ownership - but access to the network isn't always guaranteed. Why should there be antagonism between bitcoin and gold (or any other asset class)? They have subtly different benefits.

Since every node has access to the entire transactional history there is minimal obscurity - no fudging of numbers is possible, as the network will reject anything that doesn't jibe with the majority version. At the same time, nothing can be determined from an audit other than which number sent or received what amount, so privacy remains intact within the system.

I wouldn't sell all my Bitcoins because my gold might be stolen or lost; I wouldn't sell all my gold because an X-class solar flare could knock out the internet. Anything else is just temporary!

That's perfect: the giants don't care about me, and I don't care about the giants. What works for one may not be realistic for the other no matter what system is in play, so I'll use what works for me; until gold is unattainable, that's a combination of the two.

We all make our own decisions; some win, some lose and some become FOFOAn giants.

I think of it more as a game - the giants guide the shrimp one way, the shrimp try to move the other way; can't have one without the other. The shrimp just tend to grumble about it a lot.

I agree with you on the fairytale bit - it's futile to try to fight someone bigger than you using his tactics. Change comes when the rules no longer apply, so I'll simply be patient and let the old guard fade away when it's time.

Before Freegold, gold is at a deep discount. During Freegold, gold is at its true value. I like the discount part. :)

In a Mad Max De Niro world (couldn't resist), I'll still have my gold. No Bitcoins? No problem.

"I see bitcoin as a Libertarian fantasy"

Fair enough...

I view Bitcoin as an elegant structure that offers solutions in many fields and has been put to very effective use in a monetary function. Sure, it meshes well with Libertarian perspectives, but go beyond - look at the source code and tell me that isn't the foundation of a new type of superorganism. An individual computer running the Bitcoin software is as useless as tits on a bull. Throw a bunch of them into a network and complex behavior starts to occur. Repurpose the algorithms, include some input/output capacity and decision-making capabilities form. It's like digital primordial soup that's showing signs of development and I keep getting the feeling that I'm observing a rudimentary consciousness gestating. Maybe it's a type of intelligent-design to match evolutionary genetic algorithms...

This is about the monetary function, though. As far as that goes, Bitcoin is where it should've been without any of the insanity from this year. Maybe I'm placing too much credence on the inner workings over the system's performance as a store of value, but so far it's been doing well. Maybe this is a critical juncture in its non-scientific hype cycle.

I first heard about Bitcoin in 2010 and began dabbling early this year (sadly not enough to become a BTC-baller, but I'm still holding onto my first transaction from before the bubble with a vice-grip). Since then, I've only become more impressed with the system and the extraordinary amount of development going on (not just end-user interest - a lot of people who create complex software recognize it's a particularly special project). There's so much raw potential for this to change the rules with so many different things that I don't see how it could not succeed. I don't care that I don't have more - I'm willing to see the experiment through as far as possible. If it collapses from here, it was a heck of an experiment and there's tons of data to examine. Hey there's always Freegold, right?

Ramon - good to read your comments on bitcoin. Its interesting to see people are actively trying to identify and correct potential problems. I'm truly impressed by the effort being put into it.

Hi Robert, by trouble i simply mean that the euro may not be the transfer currency to freegold. I'm questioning if it is a foregone conclusion as I read here in the comments sometimes(even if I agree with that freegold is the final destination regardless).

I sometimes see FOFOA commentors elsewhere stating that the euro won't collapse because of the arguments put forward here, however I am reluctant to believe that the euro is as infallible as we may at first think.

Suppose for example that the euro area sees banking collapses next year because the ECB won't print, which drives currency to the US and prolongs the USD lifgespan by another 2-3years, long enough that gold isn't revalued in time to stabilise the euro. Then the internal issues could lead to a break-up before the wealth of the gold reseves are realised. Is this scenario impossible? is it impossible that the euro implodes under the weight of its debts(debts ran up while the globe mispriced the risks of the euro members bonds)? Perhaps the euro will still exist then but my question is - how sure are we that the euro will it be the transfer currency to freegold? How do hard currencies end again?

"Mexico was back in the bond market very quickly. Argentina got punished. The political context matters." If the banks fail because the governments can't make payment on their bonds, how are those governments going to raise the finds to nationalise the banks? The banks failed precisely due to the governments inability to raise capital which (i assume) is very different to south/central american situations outlined.

"Is it better to take the bitter medicine and face severe pain now? Or it is better to spread the pain over decades? He also answers this question in the article when he talks about Japan." and we can see that the US and UK currently follow the japanese model regardless of the evidence to the contrary. In my eyes it's just human nature.

Ultimately Im just running hypotheticals that the euro isn't as safe as we may think and we shouldn't take its existance for granted and that just because the mainstream media are all over this story now, they aren't neccessarily incorrect.

"My point is - show me a struggling developed world economy that DOESN'T use its CB to provide an implicit guarantee against losses."

Struggling characterizations aside, the EURO. Do you see the unique significance of this?

=================================

You also write:

"Now I know that the euro is different, i understand that they can print and it will only change the ratio of currency 'tickets' to reserves but what if they don't print?"

They will print to maintain nominal banking performance, but not to fund nation states. From Greece is the Word:

"This is not to say that the euro will not devalue against gold right along with the dollar. All infinite, symbolic, transactional currencies will, which is to say all currencies will. And to a lesser extent, all currencies will have to devalue against the rest of the finite real world as well. But they will not all hyperinflate to infinity in the aftermath as the dollar will be forced to. Some will. Others will not. The euro probably will not."

"The point is that the Eurosystem's response (volume expansion) to its current systemic threat (the debt crisis) is not surprising. Does this mean the euro will collapse (experience hyperinflation)? No. Because, for one reason, it has severed the link to the nation-state. The euro is behaving perfectly predictably in maintaining the nominal performance of its system through expansion, but it cannot be forced to fund the future government profligacy of the PIIGS through volume-only expansion. That link is severed."

No thinks the Euro will not fail. Rather, understanding how the Euro attempts to survive, many think they have a very good chance of having that plan come together

=================================

"Ultimately Im just running hypotheticals that the euro isn't as safe as we may think and we shouldn't take its existance for granted and that just because the mainstream media are all over this story now, they aren't neccessarily incorrect.."

They are obviously incorrect. One can be lucky enough to guess an outcome correctly and not understand why, it happens all the time.

=================================

"Suppose for example that the euro area sees banking collapses next year because the ECB won't print, which drives currency to the US and prolongs the USD lifgespan by another 2-3years, long enough that gold isn't revalued in time to stabilise the euro"

Suppose it rains purple horseshoes? Is advancing theories based on the idea "that anything could happen" in lieu of attempting to understand "why certain things might happen" the strategy you really want to adopt?

The euro doesn't have any debts. Nation states adopting the euro as their currency, have debts. But the euro is severed from the internal politics of those nation states. Unlike those countries adopting the dollar as their currency, for example.

Back at the end of the days of the gold standard, nobody said gold would collapse because the nation states using it as their currency had too much debt. Quite the opposite in fact.

The euro is like gold with a heart. It's a sort of gold standard lite.

Perhaps the euro will still exist then but my question is - how sure are we that the euro will it be the transfer currency to freegold?

Because if the viability of the euro were ever for some reason brought into serious question by the widespread collapse of euro debt, the ECB would simply revalue gold in the market and thereby enable nation states to pay off all nominal euro debts with a little golden equity.

In addition to also recapitalising its own reserves, supporting the exchange value of its euro. Bring them gold, get some euros. Bring them euros, get some gold. Simples.

What other currency can extend such an offer to the world today? The Fed's dollar?

JR: "Struggling characterizations aside, the EURO. Do you see the unique significance of this?" Checked the direction of euro target interest rate lately? What about the size of the ECB balance sheet?

I take your point that the euro isn't meant to print to fund nation states, but they also aren't supposed to allow in members that can't reach their deficit targets - did that stop anyone? Its good to see the innate strengths of the euro design but wouldn't we be prudent to check if that design has been been rigourously followed to-date?

"Is advancing theories based on the idea "that anything could happen" in lieu of attempting to understand "why certain things might happen" the strategy you really want to adopt?" The two are not mutually exclusive.

Hey DP, thanks for the response. You make some very valid points of course! "The euro doesn't have any debts." So very true!! please that as the weight of its members debts!!

"Because if the viability of the euro were ever for some reason brought into serious question by the widespread collapse of euro debt, the ECB would simply revalue gold in the market and thereby enable nation states to pay off all nominal euro debts with a little golden equity."

When you issue one of the world's most-accepted currencies, you can pay whatever you want for something if that action will be of benefit to you.

You are not constrained by "how much have I got in my life savings?"

If I am the ECB and I bid €80,000/oz for a few thousand ounces of gold in the market, this has revalued the whole market higher. This has "cost me a few million euros" - ouch! And for some "almost worthless gold" too! D'oh! IDIOT!

But wait. I have a lot more ounces than that in my reserves, which have also just been revalued. Also those ounces held by my nation state member central banks. Hmm.

If I am the ECB and I bid €80,000/oz for a few thousand ounces of gold in the market, this has revalued the whole market higher. This has "cost me a few million euros" - ouch! And for some "almost worthless gold" too! D'oh! IDIOT!

Thanks DP - I certainly take your point. And perhaps if you have to defend that peg the 80,000 may just end up being fair value sooner or later!

The ECB is not about funding nation states. They have one mandate - a *STABLE* currency. To achieve this goal they will support solvent banks with liquidity but the politicians need to solve the sovereign problems. I think we can see funding nation-state deficits is the road to HI, and this would impact the stability of their currency, yes? And we also how banking collapse would impact the stability of their currency, yes?

If the euro denominated debt's of Euro nations fail, the currency does not fail. The debtor nation-state may defaulting, but not the currency. The currency is severed. Its the promises of the defaulting PIIGS that are in issue. From an email from FOFOA:

"It is not the euro that is a poor store of value, it is the promises of governments like Greece and Italy. Anyone who held those bonds as savings was holding imaginary wealth, an illusion. That is not a flaw in the unit of account, but a flaw in the reasoning of the saver who lent his savings to a profligate government. Can you see the difference?

[...]

The currency is simply a shared standard that everyone is using to express the relative value of things in Europe, including various debts. Debts can fail, and banks can be protected by the ECB because they are the credit transmission infrastructure for the economy, and they only require nominal balance. The politicians will have to work out their bad debt situation, but that is not of dire consequence for the euro as a medium of exchange and a unit of account."

"I take your point that the euro isn't meant to print to fund nation states, but they also aren't supposed to allow in members that can't reach their deficit targets - did that stop anyone?

Lets not confuse things. The ECB is a central bank distinct from its member nation states whose sole mandate is to protect the stability of its currency. That's what the ECB does - currency stability.

The finances of nations states are are separate matter. How nation states manage their finances is the concern of those nations states. The ECB does not control this. Here is a speech by Speech by José Manuel González-Páramo, Member of the Executive Board of the ECB, making this point link:

"The institutional design of EMU gave market discipline a central role in economic governance."

==================================

The Euro was built for Freegold, where the free flow of physical gold is the marketplace's natural regulator on trade and balance of payment imbalances. The Euro was not built for the ECB to micromanage nation state fiances.

"You can't squeeze blood from a turnip. That's an old saying. It means that you cannot get something from someone that they don't have. In order to pay its debt in real terms, Greece needs to ultimately get back to producing more than it consumes. And as counterintuitive as this may sound, they will first need to run a BOP surplus in order to get there. You do that by exporting more value than you import.

I realize how backward this sounds, but that’s only because we haven’t seen gold function properly in more than 90 years—beyond living memory. And this is why the limited stock of physical gold is far more valuable than the paper gold promises of New York and London would have you believe. This is why Greece will never part with its gold at today's prices. It is far more valuable. Greece ultimately needs to get back to importing gold which is what happens when you produce more than you consume. But you can't get back to that place by spewing your real capital at imaginary capital prices.

At the true value of physical gold set by the Superorganism, Greece will automatically start running a Trade Surplus on its BOP and Germany will automatically run a Deficit with Greece. The high price of gold is the only factor that can achieve this goal. At that point Greece will be paying its debt in real terms and gold will be flowing. This will spur the Greek economy until that flow of gold is reversed and it starts flowing back into Greece. At that point Greece will have a vibrant economy. And then, as the gold flows in, it will start to act as an incremental brake, a natural governor that prevents the overheating of the new Greek economy. This will occur naturally. This is the future in real terms, regardless of all the monetary floundering. And this future cannot be managed by a committee of experts no matter what economic school of thought they practice. This is Freegold.

The elegance of this natural regulator is that, as long as it is free from systemic counterfeits, it functions regardless of the shenanigans of monetary "experts". That's because the Superorganism's price mechanism is a function of the purchasing power and flow of real capital, not the purchasing power and flow of imaginary capital (paper promises). To wrest control away from this "forceful but unobtrusive master" one must render its purchasing power and flow infertile in the global economic ecosystem. "

FOFOA said:As a currency, bitcoin is a masterful achievement in destroying virtually all of the beneficial properties of a modern, digital currency.

Haha, nicely put. Only You could formulate a sentence like that :)

Still, for me it feels like bitcoin has filled a void in doing transactions, but I guess it has more to do with anonymous banking, than with super duper modern digital currency. The feeling I get when transacting in BTC is almost the same as when I save in gold. I feel free and I feel independent from the banking-system/government. For me at least that feeling is a value-add.

In my country they require _every_ net-banking users to use a state-sponsored (but bank-cartel owned) single-login solution (With dodgy spying solutions built-in). There are also talks right now about putting a mandatory fees on all cash-transactions. We're getting strangled here it seems, and that this piss-poor (right?) bitcoin solution can feel like an improvement over our current currency/banking system really says something.

As Ramon says, concepts related to bitcoin, but with more MoE like properties are in the works. I hope they come soon.

Thanks JR, your last two posts have been very informative for me. Your first post (to PSG) that covered the line drawn around the ECBs role for supporting currency stability has tied a few different concepts together for me and i think given me the 'more complete' FOFOA/blogspot understanding of the Euro i was missing. Many thanks!

concerning the ECB bidding up the price of gold. First, the point would not primarily be to pay a huge price per ounce for some amount of gold, but rather to bankrupt the LBMA banks and to establish an allocated only market for blocs of 100 tonnes of gold to be traded between CBs. Then the price would stay high even after the ECB stops bidding.

Second, a letter by Arthur Burns has surfaced

http://www.gata.org/files/FedArthurBurnsOnGold-6-03-1975.pdf

in which he hints that he has an agreement with Germany that Germany will not purchase any gold for dollars over the official price (now $42.22). What is the opinion here? Does the Fed perhaps have some promise from the Europeans not to bid for gold?

Texan,

Victor, that scenario is checkmate.

I understand your point. But I nevertheless think that 2011-201? is different from 1971. In 1971 there were the US, Japan, Europe, and the Middle East. Everyone else was not yet developed or outside the global trade. Japan has always been 150% US faithful. And Europe needed the US because of the Cold War, and they would not have dared to openly oppose the US.

Now in 2011-201?, China will run their own allocated 30-day gold contract. There are a thousand other ways in which market participants can establish a physical only market for gold in a transparent way, without referring to the 'official' LBMA gold fixing. Just keeping the London price low and refusing to deliver the physical, wouldn't that be too ridiculous to try?

How long would it take until there is an alternative pricing for physical gold between some of the mines, some refiners, and the major coin dealers? One week? How about all those private banks that offer custodial services to their customers and that are not members of the LBMA? How about those custodians in the LBMA and COMEX network that only store bullion, but that do not deal in unallocated, for example, ViaMat or Brinks? They would be ready to continue moving the physical even of some banks cannot deliver.

Once the LBMA banks stop allocating physical to their unallocated customers, wouldn't that be the beginning of freegold, too? Just because within days, everyone else would have set up a physical only market and continued trading?

the point would not primarily be to pay a huge price per ounce for some amount of gold, but rather to bankrupt the LBMA banks and to establish an allocated only market

The nice thing is it seems like it would do both. Eurozone governments could clear their debts (which would go a long way to helping them balance their budgets in future, if their interest payments all but disappeared). The LBMA would be quickly arbed out of any remaining deliverable stock, if they insisted in continued attempts to suppress their price with paper phantoms, leaving only paper contracts and no deliverable metal. Which wouldn't fly for long with people (oil) who tend to take delivery.

Oil would then demand to be paid in euro, which they can then settle in gold via the ECB's two-way guaranteed market, rather than dollars, which are no longer able to deliver any actual gold from the paper market.

the price would stay high even after the ECB stops bidding

At those kind of €prices, the ECB might be able to pull private gold from all corners of the world to satisfy the demand from oil. So the ECB wouldn't need to buy and buy and buy, or sell and sell and sell, to maintain "their price". They would just have to intermediate the flow between the people wanting euros in exchange for their gold (shrimps) and the people wanting to get rid of excess euros in exchange for gold (oil). Oil should be pretty happy with keeping the price elevated through their insatiable demand since, again, they have massive amounts already and the higher the market price goes, the better-capitalised they become.

The alternative possible system to take over when the dollar system fails — which is only a matter of time as the physical gold backing is steadily drained from the paper markets even without the ECB/BIS arb opportunity of a lifetime opening up — would be gold as barter currency, per the goldbug demands. And that really would be problematic, because instead of a significant fraction of the world wanting gold, the whole world would need it. There simply wouldn't be enough to go around if gold was the only money. Even if it were augmented with silver. And platinum. And copper. There might be some fighting over it all. Let's hope it doesn't come to that.

"The wager is also in regards to how high the gold price moves to benefit the mining shares prior to the implementation of RPG. The problem is that I have no idea as to how long we have to go."

^exactly

Another possibility, considering ZIRP, is that a bubble could form in mining stocks before RPG which could soak up allot of dollars and actually prolong the life of the IMFS. That is what Casey Research is betting on. Mining stocks are weird. They really got over-valued after the physical top in 1980, not during the run up. They also had a short bull market in the 90's for no reason.

@VtC again: an agreement with Germany that Germany will not purchase any gold for dollars over the official price (now $42.22). What is the opinion here? Does the Fed perhaps have some promise from the Europeans not to bid for gold?

Thanks for sharing an interesting doc. ;-)

My guess is that the German nation state (and perhaps others too) agreed to this. But the ECB is a way around that, because the nation states wouldn't be buying any gold — the ECB would. Which is, as we know, severed from the nation state.

No VtC, you missed my point. It's not just checkmate for the USG, its game over for everyone, including the Chinese and the ECB. Soft defaulting the gold futures market is nothing compared to what you are suggesting.

Maybe JR can pull up the Its the Flow post. If CBs start bidding gold out of nowhere, without perhaps years of PR "prep", there will be no sellers of gold and no takers of fiat from a SOV perspective.

The entire system will collapse. Think of the USD as the "levy" for all fiat issuance everywhere.

And the idea that the ECB can just magic presto bid up gold and somehow portugal's creditworthiness (for example) will "improve" is laughably naive. The national CBs will never release their gold. It isn't for sale, ergo it is not an "asset" that can be "monetized". It doesn't back anything. There is no mechanism for real physical "exchange", and never will be. The euro is just another paper gold marker. It's gold backing is pure illusion.

“People are coming directly to us,” for large gold purchases he said. “People who want tonnes of physical gold, people with serious financial muscle…because they’re finding it’s very difficult to secure the volume of gold they want…That’s something we’ve noticed over the last 18 months, and it’s been increasing in the last 6 months. I think people are finding its hard to get physical gold.”

National CBs aren't going to sell the gold, and the ECB can't take it from them. The second that the gold price is monetized, vault doors will be locked.

And just to be clear, defending the euro currency is not what I am talking about. The issue in Europe right now is counter party solvency risk, on inter-bank and national levels. No one wants to take on someone else's risk. Raising the price of gold does nothing to change that.

To pick on Portugal for a second, how exactly would you suddenly be willing to take Portugese repayment risk (much less one of it's banks) just because the gold price rises 100-fold? Because Portugal has gold that it could then sell? Well, it could also raise taxes, or privatize companies, or engage in less public spending. Now, do you really think that with all this new found "euro money" to spend that Portugal would assiduously dole it out in 1 ton increments to pay off it's debt?

I mean, if I were them, I would just leave the euro (or not) and tell the creditors to f off. No soup for you. My incentive would now be to "free ride" the euro structure with my new found wealth for as long as I could.

I mean can you imagine a country like Italy, with 3000 tons, somehow bothering to repay it's bonds by selling gold? Why? It could just issue lire, man.

Italy has the gold! Not the creditors, not the ECB. It wouldnt need the euro anymore.

"If CBs start bidding gold out of nowhere, without perhaps years of PR "prep", there will be no sellers of gold and no takers of fiat from a SOV perspective. "

I got the opposite conclusion, that flow is drying up now as the price rises in our paper gold system *but* flow will be reestablished as paper is discredited at a floating, physical only price. From It's the Flow, Stupid:

"The price of gold today is unstable. Anyone with eyes can see that. Worse, it's rising. Which means the flow of physical gold in the quantities needed (at today's gold price) to lubricate global trade is drying up.

"Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises."

But the flow of physical gold WILL be reestablished. The world demands it. It doesn't care how high the price goes, only that the flow is guaranteed. Only the $IMFS seems to care about how high the price goes. And, apparently, that is because the $IMFS is the main printer of paper gold. Flow WILL be credibly and sustainably reestablished, which means paper gold WILL be discredited. Flow is sustainably and infinitely guaranteed at a floating, physical-only price. What that price is in today's world is anyone's guess because we haven't had such a market in centuries.

What are you up to? You are on fire with the nonesense - two posts in a row with absurd falsehoods that characterize fundamental aspects of what FOFOA has written about.

"National CBs aren't going to sell the gold, and the ECB can't take it from them. The second that the gold price is monetized, vault doors will be locked."

WAT?

Didn't you get the point from Once Upon a Time that gold can and WILL reverse the trade deficit/flow of goods at a high enough price. That at a high enough price, a small amount of gold can (and will) from debtor nations like Greece into Germany?

Just like above form Its the Flow, Stupid, here is FOFOA reaching the **exact opposite** conclusion that you claim.

"The lesson from the monetary changes made in the post-war 20s is that if you want the debtors to ever be able to repay their debts in real terms, you do not sterilize the vital spur and brake function of gold by locking its purchasing power. It is the price mechanism—price changes in goods and services—that transmits the arbitrage signal that causes gold to physically flow to where it has the greatest purchasing power. For a struggling economy to grow and expand to a point at which it can repay its debts, the gold not only needs to flow, but it must be a fertile member of the economic ecosystem so that it can perform its vital function.

I know this is difficult to see, so I want you to try a little thought experiment with me for a moment. I want you to imagine that the complex and confusing monetary plane doesn’t exist. You can still imagine the debt existing, but imagine that the debt is denominated in physical goods and services. So there’s only real goods and services… and gold—gold being the proxy for goods and services that floats in value against those goods and services.

(We can eliminate currency from the equation in our thought experiment because we know that we want a relatively stable currency—not too much inflation, not too much deflation—for the purpose of contracts and debt if we want a vibrant economy.)

Now imagine you have one country with debts denominated in goods and services. Let's call it Greece. Greece owes Germany X goods and services. Meanwhile Germany is still exporting goods and services while Greece is still importing. This leaves Germany with a structural surplus in its Balance of Payments and Greece with a deficit. But gold can reverse this flow in an instant on the BOP at a high enough price. And once it does, it will begin to exert the brake and spur forces on the two countries until the flow of actual goods and services finally corrects and reverses. Once that flow corrects, the gold flow (which is opposite the flow of goods and services) will reverse and subsequently the brake and spur forces will also reverse.

Gold flows in the opposite direction of goods and services. Remember when ANOTHER said, "gold and oil can never flow in the same direction"? Well it's the same thing with other goods and services. Germany and Greece may both be exporting and importing, but Germany is exporting more, which shows up on the BOP as a Trade Surplus and a Capital Account Deficit. At a high enough price, a small amount of gold can (and will) flow in the other direction, from Greece into Germany, and if its value exceeds the (net) trade difference between Germany and Greece, it will turn Germany's Trade Surplus into a Trade Deficit and a Capital Account Surplus. "

Compliance in setting limits on national government spending, ie the budget.

You see, this is exactly the problem the Euro avoids - the need for political willpower, and its replacement with the forces of the free market. And, given thousands of years of human political "management", these political "handcuffs" are a welcome addition.

In fact, your comments are the perfect illustration of why we need this change. You say, essentially, "if we only had more and better rules, and just stuck to them, we'd be all fine!". The whole point is that humanity NEVER sticks to the "rules" when the going gets tough.

Think of the complete overriding of mark-to-market rules by the FASB when the MBS market exploded. Humanity only responds to the harsh hand of Mr. Market. And, like the petulant children we are, we will do anything we can to shield ourselves from our "punishment".

What you can't seem to grasp is that Freegold ACTUALLY sets REAL limits on budgetary profligacy, whereas your pleas to better self-discipline will always fall on the deaf ears of the hungry collective.

To take this point further, I give you another example of how an incorrect perception of human behaviour leads to the wrong conclusion. Now, far be it for me to say that I know something John Exter didn't, but that's what I'm about to do:

“This will be a deflationary collapse rather than aninflationary blow-off because creditors in the debt pyramidwill move down the pyramid out of the most illiquid debtorsat the top of the pyramid... This explains why we are headed for deflation. Creditors will move out of debtors high in the debt pyramid as many of those debtors fail through defaults & bankruptcies... I went 100% position into gold...This will be an economic catastrophe on a scale never before seen in history. It will last for decades”

What Exter failed to realize is that all that debt is going to be socialized both directly and via currency debasement, and the defaults would not be allowed to happen. At least, when choosing to contradict Mr. Exter, I'm in good company!

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"

Past debt will basically not be repaid, be it in gold and or in real terms. Freegold is about limiting the groth future debt. Past debt will be dealt with one way or another, mostly defaults/haircuts and some printing by the ECB to keep the banking system solvent. Probably even a one time devaluation too.

Debt can fail, its more fair than devaluation, as its the saver's flaw in lending to a profligate government - from above: "It is not the euro that is a poor store of value, it is the promises of governments like Greece and Italy. Anyone who held those bonds as savings was holding imaginary wealth, an illusion. That is not a flaw in the unit of account, but a flaw in the reasoning of the saver who lent his savings to a profligate government. Can you see the difference?

[...]

The currency is simply a shared standard that everyone is using to express the relative value of things in Europe, including various debts. Debts can fail, and banks can be protected by the ECB because they are the credit transmission infrastructure for the economy, and they only require nominal balance. The politicians will have to work out their bad debt situation, but that is not of dire consequence for the euro as a medium of exchange and a unit of account."

Countries that do not repay their euro-denominated debt will be unable to stay in the "euro project".

I don't understand the logic of this. I even think that the best strategy for Greece is to default inside the euro zone and to keep the euro. The ECB will then be forced to somehow keep the Greek banks alive which will amount to a good deal of money printing - but what can the ECB do if the Greek government says "sorry, but we don't pay". Then, once the bloated government expenditures are gone, Greece could even enjoy some growth. Compare this with Argentina or Iceland after their defaults.

As far as I understand, the EU treaties have no clause for kicking some country out. So even if the French and German banks suffer huge losses because of Greece, they cannot do anything. As long as Greece wants to stay, apparently they can. Would Germany leave the Euro just because Greece defaults? I doubt it. Perhaps they are even happy if they get a good excuse for truncating their banking sector.

Don't you love it when a comment spurs a post-length response from me? Ha! Well, in any case, here you go… (1/5)

"Second, a letter by Arthur Burns has surfaced in which he hints that he has an agreement with Germany that Germany will not purchase any gold for dollars over the official price (now $42.22). What is the opinion here? Does the Fed perhaps have some promise from the Europeans not to bid for gold?"

Thanks Victor. That was 1975, and I think there are a few things to consider in forming an opinion on this. It might be helpful to break it down into little acorns.

First of all, let's note that the Fed had two concerns with regard to CB gold in that 1975 letter. 1. That CBs not buy from the market which would affect the market price, and 2. That CBs refrain from revaluing their gold to market price which, according to Arthur Burns, would create liquidity that would be out of the Fed's control. #1 could be considered the price suppression that we hear GATA and ZH talk so much about. #2 could be considered the ECB MTM concept that we have yet to hear anyone else talk about. (The links are to the GATA and ZH posts about the Burns letter.)

So for our first acorn, let's look at #2 with regard to the Bundesbank. Now, if we consider the conceptual evolution of "the Freegold school of thought" holistically, I think it is fair to say that Freegold, as well as the road to monetary union and the single currency, has French fingerprints all over it. The Austrians were certainly thinking along similar lines at the same time and, perhaps intentionally, developed their ideas into an actual school of thought. The French, on the other hand, with names like Marjolin, Rueff and de Gaulle, simply took action.

It is interesting in the Burns memo that he noted the French had already *GASP* started MTM gold in 1975:

"Fourth, a large measure of freedom for governments to trade in gold at a market-related price may easily frustrate efforts to control world liquidity. For example, such freedom would provide an incentive for governments to revalue their official gold holdings at a market-related price. (France has already done so.)"

So see? The French were the first to pull out of the London Gold Pool in 1968, they were the first to demand their gold from the US Treasury, and then, after 1971, they were the first to MTM their reserves.

The Germans, on the other hand, used a valuation principle they called Niederstwertprinzip which was, as I noted in this post, "even more conservative than the US... The principle of Niederstwertprinzip means you value your assets at the lower of two possible prices, the purchase price or the market price, whichever is lower at revaluation time. In other words, you record unrealized losses but never the gains. This is a highly prudent and conservative method of valuing one's assets. They would value their liabilities the opposite way, at the highest possible value. But in practice, this was an overly conservative method of valuing an asset whose price had appreciated over many decades."

While this doesn't directly address the deal as Burns described it to President Ford, it does show that the Germans had more in common with the Fed's $42.22 book valuation than anyone else, and they also had a lot of gold. Of course the Bundesbank did in fact MTM its gold later, in 1997, in preparation for the euro launch as I wrote about in that same post. And on that alone, it's quite a stretch for me to think they might still have a deal prohibiting them from paying more than $42/ounce for gold.

Another acorn we can carry easily is this idea that seemed so important to the Fed, of a separation between official and unofficial gold. Basically, Arthur Burns stated the issue most clearly as the Fed's fear of CBs transacting in gold "at market-related prices." This is what we call a two-tier market, and I have written about the "membrane" that exists between official and unofficial gold. From an old comment:

"Since 1933 there has been a thin membrane that separates sovereign entities (SE) from private entities (PE) when it comes to gold transfers.

Gold moves from PE > PE as a commodity. And it moves from deficit running sovereign entities (SE-D) to surplus running sovereign entities (SE-S) as a monetary asset; a balancing function in the monetary system. SE are different than PE because they can print money, and they collect foreign currency surpluses.

Whenever gold starts to pass through that membrane, no matter in which direction, a phase transition starts to occur. If a SE-S tries to buy gold from the PEs, gold starts to phase-shift from a commodity into a monetary asset. If a SE-D tries to sell gold to the PEs for the foolhardy scam of lowering its commodity value, gold starts to phase-shift to a monetary asset because it is clear what SE-D is doing (especially to SE-S).

Freegold will be the elimination of the membrane. All players will be on a level playing field. This is not a gold standard. But it is a shared function for gold between SE and PE.

By the way, think about $6,000 gold trading amongst the giants with this membrane in mind."

"The paper gold market (mine hedging, forward sales, gold leasing, futures, ETF's etc...) became (serendipitously?) a way for the SEs to "virtually" permeate the membrane without breaking it and causing a phase shift. This was a way to trick the PEs into settling the trade deficit with certain SE-Ss. It worked as long as the SE-Ss (large physical accumulators) were limited in number. And it always had a finite timeline when the expanding virtual gold would finally lose credibility."

This membrane was a façade that existed even before 1971, and it was this membrane that Arthur Burns wanted to retain, at least superficially. US Treasury and IMF auctions beginning that same year certainly violated the membrane, as did the London Gold Pool of the 60s and the BOE auctions of 1999-2002. So it was fine for deficit-running CBs to sell gold at market prices but not okay for surplus-running CBs to buy gold at market prices. This was the secret Fed strategy to continue sterilizing the natural adjustment mechanism that began in 1922.

Now, with the apparent disagreement between the Fed and the US Treasury in Burns' memo, as well as the fact that France was already MTMing its gold, does this sound like all CBs wanted to control the price of gold? Or perhaps it was just the Fed. From the GATA link above, "Burns memo is consistent with the long-established interest of central banks in controlling the gold price..." This is the standard goldbug thesis, that all CBs conspire to control the price of gold. But it was not ANOTHER's message.

As I wrote above, "Freegold will be the elimination of the membrane." Euro architect Alexandre Lamfalussy wrote something similar all the way back in 1969, which I put in this post:

"Even in the absence of effective purchases or sales on this market by the central banks, this price would only become the "true" price if all the buyers and sellers of the metal acquired the conviction that no central bank will ever connect the two markets in any way. As long as this conviction does not exist—and it does not appear to exist today—the price on the ordinary market will take into account potential purchases and sales by the official institutions. Quite clearly, the market is at the moment discounting possible purchases (rather than sales) by the central banks."

He basically said that the price of gold would only be the "true" price if the membrane separating official and unofficial gold was 100% impenetrable. It logically follows that the price would also be "true" if the membrane was eliminated. So the Fed wanted to keep official and unofficial gold separate, except when it suited them to sell official gold into the market. The Fed also didn't like that France revalued its gold to the market price, because this act alone was a violation of the membrane.

You see, there is no membrane if all official CB gold is marked to the same price made by the free market. And there is no membrane if CB gold is allowed to be mobilized, which ironically makes it even more valuable. In this post I wrote:

"You see, the European gold reserves are far better, far more credible than the US gold reserve, simply because they engage in a two-way gold market, and have for decades. The US gold has been hoarded and locked away for more than 30 years, never deployed in case of emergency. The European CB's took a lot of flak for selling gold over the past two decades, but that action is precisely what makes them so much more credible (and valuable!) than the US gold hoard. Any trading partner knows full well that if all else fails, gold will be paid."

And finally our last little acorn; the launch of the euro. Did anything change with the launch of the euro? GATA and ZH don't seem to think so. Yet in preparation for the euro, Europe's official gold was revalued to market and mobilized. Then came the CBGA, and finally the price lifted off from its 20 year gravity-bound trading range and never looked back. So why, when we read the ZH article about this Burns document do we get this:

"Furthermore, the memo goes on to highlight the extensive level of gold price manipulation by central banks even after the gold standard has been formally abolished."

And from GATA we get this:

"the Burns memo is consistent with the long-established interest of central banks in controlling the gold price"

Why are the goldbugs getting it so wrong? The answer is found in this post:

"Several years ago, many gold bugs and gold advocates missed the path as the trail turned."

Oh, by the way, this is FOA writing back in 2001, and that turn in the trail was the successful launch of the euro…

"As most of you will no doubt agree, almost all gold discussion still centers around "the dollar's war with gold". Truly, the evolution of this story will be how that war ended then and now the dollar's war with the Euro began!"

Enter ZH and AEP stage left, right Matt? ;)

"Yes, the war now is between the Euro and the dollar! The Washington Agreement placed gold "on the road to high prices" as it signaled a phasing out of Euro support for our American gold values. How fast gold can, now, rise will gauge how much staying power the dollar has in all this. If there is any gold war now, it's to be in just how fast the dollar gold market can disintegrate into worthless IOUs!

The war between gold and the dollar has been over for a while now. The action, today, is between the dollar and the euro arena and this is what will break the price lock on gold. Leaving gold bugs with a lot of questions that ask why this: both systems will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to!"

Let me just pause to say, Wow!

"They shifted their war on gold to become a war on the Euro,,,, only too late. Now, knowing that the Euro is a fact, we must have a super gold price if the dollar is to stay in the game! The question becomes one of supporting a cheap paper price for the sole function of keeping the market and all its bullion players alive. With the war on gold over, they need to turn their tanks around to face the real enemy but cannot."

So now Victor, let's look back at your question again. You wrote:

"Does the Fed perhaps have some promise from the Europeans not to bid for gold?"

I'd say, asked and answered. What say you, Vic? Oh, and isn't it funny how Texan shows up with gems like this:

Texan: "I just don't think raising the gold price helps, and I think it would probably hurt actually."

Texan: "The issue in Europe right now is counter party solvency risk, on inter-bank and national levels. No one wants to take on someone else's risk. Raising the price of gold does nothing to change that…

Because Portugal has gold that it could then sell?"

Texan, raising the price of gold creates liquidity of the best kind. You don't even have to sell! See, Arthur Burns' own words:

"… such freedom would provide an incentive for governments to revalue their official gold holdings at a market-related price. (France has already done so.) This in turn could result in the addition of up to $150 billion to the nominal value of the countries' reserves. Liquidity creation of such extraordinary magnitude would seriously endanger, perhaps even frustrate, our efforts and those of other prudent nations to get inflation under reasonable control."

"There is one type of liquidity that is of absolute importance. And that is "international liquidity". It is the kind of liquidity that lubricates the cross-border flow of real, essential goods like heating oil, food and medicine. It is the very existence of this imperative for sufficient international liquidity that puts the greatest strain on a fiat currency system at the very end of its timeline while it desperately tries to push out "unlimited liquidity", but fails to do more than push on a string."

And then some more from Lamfalussy in 1968 from that same post about how raising the gold price creates this most vital type of liquidity:

"The striking fact apparent from this Table is that over the last ten years, gold has practically no longer contributed to the growth of international liquidity. In ten years, total foreign reserves rose by nearly 19 billion dollars; the greater part of this increase – some 14 billion – was due to increased holdings in foreign currencies, whereas the increase in the reserve positions with the International Monetary Fund was about 4 billion. The increase in gold stocks was less than one billion; in fact, there was a decline between 1963 and 1968 [thanks to the London Gold Pool]. Consequently, the share of gold holdings in total reserves, which was 66 per cent at the end of 1958, fell, to 51 per cent at the end of 1968.

It is therefore right to say that over the last ten years and in particular since 1963-64, we have witnessed a gradual decline in the role of gold as a means of reserve and its complete disappearance as a source of new international liquidity. At the same time, the mechanics of the gold-exchange standard have ceased to function: the creation of reserves by the spontaneous holding of dollars or Sterling has come to a halt and has been replaced by the creation of negotiated reserves."

And then I wrote:

"I would like to draw your attention to the almost interchangeable way Lamfalussy used the terms international liquidity and reserves. It seems that gold's share (percentage) of total reserves has something to do with that most important type of liquidity, "international liquidity". That's because, when properly defined, they are ONE AND THE SAME!"

Take that ^^ along with Arthur Burns… "..addition to the nominal value of the countries' reserves. Liquidity creation of such extraordinary magnitude…" and you get…

Texan: "I just don't think raising the gold price helps, and I think it would probably hurt actually."

Haha! Not really. I'm sorry Texan, but I'm only using your marvelous words to demonstrate how ass-backwards one's thinking can be. I think, Texan, I'd give you the same prescription I gave Matt: a little less ZH and AEP/FT Alphaville in your appetite. ;)

Incidentally, JR and I have had a nice conversation via email about how gold creates liquidity (the best kind), but since this comment is already way too long, I'll let him fill you in on that if he wants to. ;)

After that fantastically hearty breakfast that you provided for me over the weekend and now FOFOA serving up a cordon bleu lunch, my gold liquidity jigsaw is has just about all the pieces in place.

On a side note, from your comment above, you wrote:

" Past debt will be dealt with one way or another, mostly defaults/haircuts and some printing by the ECB to keep the banking system solvent.

I have been thinking about the amount of printing that would need to be done in order to ensure the nominal performance of the banking system.We know what the exposure of the major European banks have to periphery, or even core debt, so if a contagion occurred and a mixture of haircuts and defaults caused losses for the banks, we could get a good idea of how much printing would be needed.

However, what is never talked about when dealing with recapitalising banks is their derivative exposure (probably because the exact figure is not known). Some of the European banks have some of the highest gross exposures (it is gross that is important, not net, due to mass counterparty defaults) to derivatives in the world (estimated).

In order for the banks to remain nominally solvent, these exposures would need to be covered with printing.Here I see only two options, 1) revaluing gold and releasing that massive liquidity generating engine, or 2) outright printing that would undoubtedly cause hyperinflation, even in the Eurozone. No currency on Earth could cope with creating hundreds of trillions of currency units of liquidity without the help of gold.

So, does this mean, from your comment above, that such a default/haircut scenario for the banks would mean immediate freegold revaluation?

Japanese Finance Minister Jun Azumi will be rewarding investors who buy more than 10 million yen ($129,000) in reconstruction bonds with gold in the government’s latest attempt to bolster demand for the debt.

Well, post-default and assuming no further euro transfer payments from the troika, Greece wouldn't have any circulating euros. I don't imagine they would even have any solvent banks.

They would suffer a terrible, crushing depression as euro currency would be hoarded, since in addition to not having many euros to begin with, there would be a growing expectation that the government would introduce a new currency.

Which the government would pretty much have to do. They would not be able to pay salaries and suppliers in euros.

The two countries you mentioned controlled their own currencies, and after they defaulted they suffered staggering 75% devals. If Greece defaults but cannot deval, the adjustment will come through a reduction in economic activity.

Your "liquidity" pre-supposes that post-reval, the gold will flow out of Europe CB vaults if it is called upon by trade surplus nations.

I don't think it will. It is becoming increasingly clear to me that the euro was designed from the outset as a kind of "long con", that is the promise of gold at some future date, if needed, but without any real intent to transfer it. The implied gold - backing was required to get the thing accepted at the outset so they had to create some bonafides. And how better to prove one's trustworthiness in this respect than to "give 'em a taste" and sell a bit of gold.

The national CBs are never going to allow any of their gold stock to be sold in any meaningful quantities. Notice that it isn't even discussed, and that every time a politician says "Greece/Portugal/country X should post gold as collateral", the idea is quickly shushed up. Why? A) because it isn't going to happen at the national level, and B) because the core countries don't want the membrane to become penetrable! Because if Greece has to post its gold as collateral, then why shouldn't Spain? And then Italy? And then France?

The euro is not advertised. It is not backed by gold, and it has no claim on gold. There is no "window". Not now, and not at higher prices.

"What I thought was the most fascinating of Mark’s comments during the interview, was his observations of major gold buyers emerging from the Middle East & Asia. “People are coming directly to us,” for large gold purchases he said. “People who want tonnes of physical gold, people with serious financial muscle…because they’re finding it’s very difficult to secure the volume of gold they want…That’s something we’ve noticed over the last 18 months, and it’s been increasing in the last 6 months. I think people are finding its hard to get physical gold.”"

Because at today's prices, no country is willingly going to sell their gold to repay their mountainous debts. They'll sell it to ensure their favoured customers keep showing up, sure, but not to anyone they don't have to rely on. They know its value is currently suppressed by a sea of paper liquidity. They themselves provided a lot of the liquidity, before they turned off the tap once the bath was full.

Twenty years to draw a bath - wow! You could throw out a mecha-baby with that much bathwater.

"Because at today's prices, no country is willingly going to sell their gold to repay their mountainous debts"

Bingo!

A revaluation to several orders of magnitude higher means that A.)far less of "the precious" will need to be sold to do what's required, and and B.)that gold will freely flow in whatever direction it needs to. CBs will not need to wring their hands about divesting themselves.

Are you thinking the ECB will make a desperate and futile attempt to keep the euro "as strong in goods and services (including gold?) as it is today"? I ask because for the first few days of my reading here, I still thought that too.

DP,

No, its impossible for you to speak for me. But it so happens that I think you just did. Spooky.

Edwardo: gold will freely flow in whatever direction it needs to. CBs will not need to wring their hands about divesting themselves

I don't know about you guys, but at a realistic free physical price, I will definitely do my bit for queen and country. I mean, once gold has been one-time-revalued and my local CB and gummint has got with the program, what is gold's utility to lil ole me any more?

They haven't conned anybody - they can either kill their currency in a massive collapse and WWIII it up, or they can do what they built their currency for and instead establish a stable international system with their trading bloc at the forfront of world economic growth? Hmmm.

It is not just their statements, it's their actions: making gold the central monetary asset, marking it to market, selling it into the market.

So will they sell their gold? It doesn't really matter - Freegold is coming either way. It's their choice to jump on board or get run over? I wonder which one they will pick?

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